Banking Law

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What is proprietary trading?

-Engaging as a principal for the trading account of the banking entity in the purchase or sale of a security or other financial instrument.

What happened during the financial panic of 1907?

-Financial panic of 1907 Stock market crashed, Bank refused to: 1.Redeem bank notes 2.Permit large withdrawals 3.Make loams.

What was the result of the subprime mortgage loan crisis, good and bad?

-Some banks and thrifts kept single family mortgages on books -Banks and thrifts also kept acquisition and development loans -Real estate values declined -Borrowers stopped repaying mortgage loans. -Banks and thrifts lost money.

What is an income statement?

-Summarized financial performance over a period of time. -Reventues -Expenses -Operating income -Interest expense -Taxes Net earnings/net income

Did the CRA cause the increase in subprime mortgages?

-Were the majority of subprime loans made by lenders that were covered by the CRA? -Only 6% of the higher priced loans made to lower income borrowers or neighborhoods were made by lenders covered by the CRA

What did the Bank Secrecy Act say?

-a.Requires banks to keep records and report certain transactions to facilitate government investigations regarding criminal, tax or regulatory matters. -b.Banks are required to report all currency transactions with a monetary value of more than $10,000.

What is the definition of a bank under the Bank Holding Company Act?

-i. Any institution insured by the Federal Deposit Insurance Corporation or -ii. Any institution that both accepts demand deposits and makes commercial loans. If you're in one category or the other, then you're a bank under the bank holding company act.

What is Preferred stock?

i.Usually had greater rights and privileges than common stock, including the right to a preference in dividends.

Should banks be subject to special regulatory treatment?

1.Banking is one of the most highly regulated industries. 2. What public policy purposes are served by regulating banks? a.We want to prevent runs and panics because that harms a lot of people and companies. b.Provides a stable money supply and financial system. c.Provide credit and liquidity to individuals and businesses. ex:When there's a run, even the banks that aren't having a problem will stop lending. d.Provide an efficient means of conducting economic transactions by writing checks. Some other entity wouldn't be as safe because it wouldn't be FDIC insured. e.Protecting consumers. f.Law enforcement. 3.Do these purposes justify the high level of regulations?

What did the temporary liquidity program do?

1.Established on October 14, 2008 2.Debt guarantee program 3FDIC guaranteed payment of newly-issued, senior unsecured debt of insured depository institutions. 4.Senior unsecured debt includes federal funds purchased, promissory notes, commercial paper, and certificates of deposit 5.Guarantee was put in place to encourage banks to lend to one another again and ease the credit crisis.

What are the three requirements of a bank?

1.Federal or state charter to operate 2.Meets the services definition of a bank 3.Meets the economic function of a bank.

What are Risk weight categories?

measurement of credit risk of assets listed on the balance sheet.

What were some reasons state banks did not convert to national banks?

1.Regular bank examinations Don't want govt to come in and say that bank isn't doing anything like reserve requirements. No additional regulation. 2.Higher reserve requirements on national level than state level 3.Higher minimal capital requirements 4.More restrictions on loans. Thought it would be worse for them to convert to a national charter.

What are the CAMELS composite ratings for banks and credit unions?

1.Sound in every respect 2.Fundamentally sound 3.Some cause for concern 4.Unsafe and unsound 5.Extermely unsafe and unsound.

What are the CAMELS individual component ratings for banks and credit unions?

1.Strong 2.Satisfactory 3.Less than satisfactory 4.Deficient Big jump between 3 and 4, 4 is really bad. 5.Critically deficient

Under the truth and lending act finance charge, how many days to consumers have to rescind from home equity loans?

3 days.

What is a securities broker?

Acts as agent of an investor and places a buy or sell order for the account of the investor.

What is the special community development test under the CRA?

Applies to wholesale and limited purpose banks. This test is designed to take into account the fact that such specialized institutions are not in the business of making consumer or small business loans and accordingly may find it difficult to comply with the rules of generally applicable depository institutions.

Why would majority shareholder want 100% ownership of a bank?

Avoid fiduciary duties to minority shareholders.

Suppose a bank has 100 million in capital. How much can a bank lend out?

Bank can lend 15 million insecure to borrower A And to additional 10 million secured by readily marketable collateral.

Credit crisis for banks extended to credit crisis for bank borrowers. How?

Bank loans primary source of capital for individual and many businesses b.When credit markets dried up, banks stopped lending to other banks, consumers and commercial customers.

How should investment banks be blamed for the subprime mortgage crisis?

Blamed for creating incredibly complex structured products that were not as reliable as they appeared.

What is a bank sweep acocunt?

Checking accounts didn't earn any money, any interest so they created a non-interest bearing account during the day, and sweeped that money into an interest bearing account during the night Then the next morning could sweep back into the interest bearing account. As a result dodd frank act

What is conflict preemption?

Court will look at whether the state statute conflicts with federal law Physically impossible for bank to comply with both laws

What damages mat a court award a for.a bank's bad faith breach of a loan agreement?

Damages for breach of contract generally cover only pecuniary losses. But some courts have held that bad faith breach of contract can give rise to tort liability and enable a plaintiff to recover damages for emotional distress and some types of economic loss unforeseeable when the contract was made, as well as punitive damages.

What did the Federal reserve sale of securities do?

Decrease reserves of the banking system. Decrease in supply causes an increase in the federal funds rate. Reduces the loans and deposits. Reduces growth of money and credit.

How is the OCC funded?

Each national bank pays an assessment fee to the OCC That's how they're funded. Different from the IRS who has to ask money from Congress every year

What did the Garn-St. Germain Depistory Institutions act of 1982 do?

Eliminated the regulation Q thrift differential Permitted SUPER NOW accounts in addition to regular NOW accounts: they were flexible money market interest rates and federally insured accounts with the highest rate of interest.

What is the Bureau of consumer financial protection?

Established by dodd-frank act Independent bureau within Federal Reserve System Regulates the offering and provision of consumer financial products and services. Consumer financial product or service is any financial product or service offered or provided for use by consumers primarily for personal, family or household purposes. Consumer financial civil penalty fund Civil penalties are placed in the fund to compensate victims. Unfair, abusive and deceptive practices. Goal-> ensure that consumers are protected from unfair, abusive, or deceptive acts and practices and from discrimination

What did the Banking act of 1933 (otherwise known as the Glass-Steagall Act) do in response to the banking crisis?

Established the FDIC. Separated commercial and investment banking. Prohibits investment bank buys securities. Prohibits banks from owning equity securities and underwriting and dealing in corporate securities.

What does the Office of of Thrift Supervision do?

Established under financial institutions reform, Recovery and enforcement act Regulated federally-chartered and state chartered thrifts and savings and loan holding companies Issued regulations for these institutions and supervised through periodic on site examinations. Issued federal charters for S&L associations and savings banks Dodd-Frank Act abolished OTS and transferred its powers and responsibilities to the OCC, FDIC, and Federal Reserve Board. OCC is now responsible for regulating Federal Thrifts FDIC is now responsible for regulating state-chartered thrifts Federal reserve board is now responsible for regulating savings and loan holding companies.

Why did Congress Eliminate the OTS?

What is Field preemption?

is the federal law supposed to occupy the entire field of law.

Is the banking industry highly regulated or minimally regulated?

Existence of federal deposit insurance is the primary rationale for the highly regulated nature of the banking industry!

To reduce interest rate risk, what was done?

lenders sold most of the mortgage loans. To invest banks or to government sponsored entities: Freddie Mac or Fannie Mae Pooled the mortgages in a process known as securitization Created securities backed by the mortgage loans Sold these mortgage-backed securities to investors on secondary market.

National Bank Act does preempt or alter the applicability of any state law to subsidiaries, affiliates or agents of national banks.

False. National Bank Act does not preempt or alter the applicability of any state law to subsidiaries, affiliates or agents of national banks. Potentially more burdensome because subsidiaries have to comply with all the state laws. The reason why the national bank were keeping them in subsidiaries, hard to pierce the corporate veil. Making the parent corporation liable for the subsidiaries.

True or false: Reserves and liabilities can both be negative.

False. Reserves could be negative but not the liabilities.

What was specie? What did it cause the money supply to do (1863-1864)

Gold or silver. Caused the money supply to contract because had to borrow gold and silver. Banks gave the gold and silver as part of the loan proceeds.

To remove or prohibit an IAP agency must demonstrate that:

IAP violated a statute, regulation, final cease and desist order, condition imposed in writing, or written agreement Participated in an unsafe or unsound practice, or Breached a fiduciary duty.

What is a bank merger?

one corporation mergers into another corporation known as the surviving corporation. Bank A-> Bank B (survivor)

Suppose ALLL is $10 million Risk-weighted assets are $50 million. What is the tier 2 capital?

Include 50mil x .0125=625k in Tier 2 capital.

What is the legal form definition of a bank?

Institution with federal or state charter to operate as a commercial bank. Stuff that behaves like banks: Money market mutual fund, credit unions.

What is the service test under the CRA?

It evaluates a bank's record of helping to meet the credit needs of its assessment areas by analyzing both the availability and effectiveness of a bank's systems for delivering retail banking services and the extent and innovativeness of its community development services.

How does the Volcker rule help to end "too big to fail?

Limits investments in hedge funds and private equity funds in the aggregate to 3% of tier 1 capital

What does liquidity mean?

Liquidity is a measure of how quickly and easily an asset can be converted to cash.

What is the effect of the Federal Reserve increasing or decreasing the discount rate?

Loans from discount window Increases legal reserves Increases the money supply Repayment of discount window loans. Decreases legal reserves. Decreases the money supply.

What are Credit conversion factors?

Measurement of the probability that off-balance sheet items will become on-balance sheet assets or liabilities. Also include a measure of credit risk.

Organization certification includes:

Name of the proposed bank must include the word "national" or the initials "N.A." stands for national association. Place of operation. Amount of stock and number of shares Number of shares held by each shareholders

Does the Gramm Leach Bliley Act preempt state law?

If the application receives final approval for a bank what happens?

OCC will issue a charter certificate. Another application might come in where there is not too much experience on the organizers part. An incentive to grant more charters. More charters they have, the more fees they make.

If a bank is in violation of the CRA what type of enforcement action can the regulator take?

Only enforcement action is on applications for deposit facilities Has no teeth

What did the Depository institutions deregulation and monetary control act of 1980 do?

Phased out interest rate ceilings on deposit accounts. Thrifts and commercial banks offer NOW accounts.

What is regulatory capital? How is it calculated?

Regulatory capital is the amount by which the bank's assets exceeds the bank's liabilities. Regulatory capital=net worth or shareholder's equity. Overall in a general sense^ Assets-liabilities=shareholder's equity=regulatory capital.

What is the community reinvestment act?

Requires depository institutions to make an affirmative effort to meet credit needs of low and moderate income customers consistent with safe and sound banking practices. Geared toward banks.

What are the collateralized mortgage obligation (hierarchy)?

Senior tranche (First to Receive Cash Flow and Collateral) (AAA) (lower risk of default) Mezzanine tranche (BBB) (not as quite as risky) Subordinate tranche (First Defaults) (most risky)

Mismatch between duration of assets and duration of liabilities. What will this cause?

This mismatch causes interest rate risk

True or false: National Bank Act does not occupy the field in any area of state law.

True.

True or false: The CFPB's (Consumer Financial Protection Bureau) QM rule doesn't prohibit loans to borrowers who don't meet the required underwriting standards, but does deny the QM safe harbor to their lenders, potentially raising their cost of credit or cutting off their access to mortgage financing.

True.

True or false: membership to the Federal Reserve is required for National Banks.

True.

True or false: State Consumer Financial Law applies to a subsidiary or affiliate of a national bank to the same extent the law apples to any person, corporation, or any other entity subject to State law.

True. This eliminates preemption for subsidiaries of national banks with respect to state consumer finance laws Ex: Mortgage lending subsidiary had no preemption.

Under Gramm Leach Bliley Act, banks can affiliate through financial holding companies with full service financial firms offering such services as:

Underwriting, dealing and brokering securities. Acting as an investment advisor Merchant banking (private equity) Underwriting and selling insurance

What was unit banking and how did it change the south's banking status post civil war?

Unit banks had a fixed and permanent abode (permanent residence). National banks prohibited from branching. Unit banks- had a single office. Could keep their national branches going. Civil war did away with the state banks in the south New banks in the south had national charters so they couldn't branch. Ended up separating off because they became national banks. Additionally caused a decentralized network of correspondent bank relationships One bank holds deposits and performs services for the other like clearing checks Smaller banks would deposit excess funds and larger banks would perform services that smaller banks couldn't perform sufficiently.

All subsidiary FDIC insured depository institutions must be:

Well-capitalized Well managed Satisfactory record under community reinvestment act

What is Preemption by implication?

Whether the federal law is intended to occupy the entire field of law, State law can be preempted by implication

Can banks export late payment fees to another state just like they can export interest rates?

Yes. Late fees fall under interest rates. Same thing

What happens if a party disagrees with decision of arbitrators?

a.Comptroller will provide a reappraisal of the shares. b.Not subject to judicial review.

March 17, 2008-J.P. Morgan Chase agreed to acquire Bear Stearns with Federal Reserve providing a $30 billion guarantee. Why did the government do this?

a.Government did not want Bear Stearns to fail. b.Concerned about systemic risk that would occur if Bear Stearns was unable to pay on its credit default swaps held by its banks.

Investors started having fears about asset quality of banks because of:

a.Investments in MBS backed by its subprime debt b.Retail mortgage loans banks held on their books, including subprime loans and acquisitions on development loans to housing developers

What is a private equity fund?

a.Make longer term investments in private companies (portfolio companies) b.Tend to make highly leveraged investments in these portfolio companies.

What are the responses to a critically undercapitalized institution?

a.Payments on subordinated debt prohibited i.No principal or interest payments to subordinated debt holders starting 60 days after institution becomes critically undercapitalized. b.Conservatorship, receivership or other action required. i.Within 90 days after bank becomes critically undercapitalized: 1.Regulators must appoint a conservator or a receiver OR 2.Regulator must take some alternative action that would better serve to avoird or minimize losses to the Deposit Insurance Fund. ii.As a conservator, FDIC will operate a problem institution as going concern until the problems are resolved. iii.As a receiver, FDIC winds up affairs of institution and uses asseys pf insitutio to pay its creditors.

What are the problems with hedge funds and private equity funds?

a.Proprietary trading, private equity funds and hedge funds can be highly risky Use of leverage increases the risk to the funds May increase systemic risk.

What are demand deposits?

balances in bank accounts that depositors can access on demand by writing a check. Banks are funded by demand deposits, contrary to other financial intermediaries.

Under CAMEL how does the NCUA (National Credit Union Administration) determine the asset quality requirement for credit unions and banks?

i.Examiners will determine the credit risk of the bank's loan portfolio and securities investments. ii.Examiners will consider management's ability to identify, measure, monitor and control credit risk.

Under CAMEL how does the NCUA (National Credit Union Administration) determine the earnings requirement for banks and credit unions?

i.Examiners will review the earnings of the bank and any upward or downward trends. ii.Examiners will consider how interest rate risk, loan losses, and increase in expenses will affect earnings.

What is bank consolidation?

two corporations consolidate into a new corporation known as the successor corporation. Bank A and B-> C.

What did the Bank Holding Company Act of 1956 do?

-All bank holding companies regulated by the federal reserve -Douglas amendment-prohibited BHCs from: Acquiring banks in other states unless acquired bank's state expressly authorized by statute. Not concerned with wildcat banking. Don't care as long as its reciprocal Limited to activities closely related to business of banking 1956 Act- exempted one-bank holding companies.

What is a trading account?

-Any account used for taking positions in securities principally for the purpose of selling in the near term to profit from short term price movements. -Under the implementing rules, there is a rebuttable presumption that the purchase or sale of a financial instruments is for the trading account if the banking entity holds the financial instrument for less than 60 days. Less than 60 days in the restrictions of the volcker rule, more than 60 days not considered to be proprietary trading.

What happened during the Savings and Loan Crisis (1980-1989)?

-Inflation -Tightening of monetary policy -Rise in interest rates -Disintermediation from banks and thrifts. Drained banks of liquidity

Lending limits do not apply to:

-a.Loans to the federal govt or loans secured by US govt obligations , such as T-bills. -b.General obligation loans to a state or local govt, or loans secured vy a general obligation of a state or local govt. -c.Loans secured by a deposit account held at the bank. -d.Drawing on uncollected funds in the usual process of collection. -e.Advancing additional money for repayment of: i.Taxes ii.insurance iii.Utilities iv.Security v.Maintenance and operating expenses When needed to maintain the value of the real property securing the loan As long as the purpose of the advance is to protect the bank's own interest in the collateral -f.Emergency loans to other financial institutions with OCC approval g.Investment in debt securities A bank can invest in investment grade debt securities of a single issuer up to 10% of the bank's capital. This investment is separate from the bank's lending limit. Can lend to same company up to the full amount of the ledning limit -h.Financing sale of assets owned by the bank, including foreclosed property As long as financing does not put the bank in a worse position than when the bank owned the asset. -i.Renewals or restructures of loans that were within the lending limit when made, but have since become nonconforming loans because: Bank's capital has declines.

What is the truth in lending act finance charge?

-i.Total dollar cost associated with granting the loan -ii.Equal to sum of all charges the customer must pay as a condition for receiving the loan. Interest Credit investigation fees Insurance to protect the lender Points on a mortgage loan Finance charge must be converted into the annual Percentage rate (APR) Able to better compare the loans from different lenders

When can a Regulator appoint a conservator or receiver of an undercapitalized institution?

1. No reasonable expectation that institutions will become adequately capitalized. 2.Institutions fails to submit timely and acceptable capital restoration plan or 3.Institution materially fails to implement the plan.

What did the savings and loan holding company act do?

1.Limited activities of thrift holding companies Exempted unitary thrift holding companies Ex: A certain number of home mortgages. Lending out enough home mortgages, will allow you to be exempt. 2. Growth of thrift institutions Convereted from mutual ownership by depositors to stock ownership by stockholders. Credit unions are all owned by their depositors.

A bank has 20 mil in deposit accounts 10% as required reserves. What are the required reserves?

20 mil x 10%=2 mil.

Executive officers are directors of nonbank affiliates will not be treated as insiders if:

Affiliates does not control the bank Affiliate makes up less than 10% of parent company's consolidated assets Bank's board excludes executive officers and directors of nonbank affiliate from participating in policymaking functions of the bank and those people do not participate in those functions.

What are assets?

Assets are economic benefits obtained or controlled by economic entities in past transactions.

Why did the Dodd Frank Act establish the Volcker Rule?

Believed banks shouldnt be making such highly risky investments. a.Under Volcker rule, proprietary trading and acquiring or retaining ownership interest in or sponsoring a hedge fund or private equity fund are prohibited for a banking entity.

What is tier 1 common equity?

Common shareholder's equity

True or false: A national bank become a partner or co-venturer in a community development project.

False. They cannot do this. A national bank cannot make investments that subject it to unlimited liability. A national banking association can, however, make investments in community development projects directly or by purchasing interests in an entity primarily engaged in making such investments.

True or false: Homeowners may not defend against foreclosure, seek damages, or recover foreclosed property on the ground that the parties who initiated the foreclosure failed to comply with some requirement of state law governing foreclosure cases.

False. They may.

What were the powers that the Federal Reserve had before the Dodd Frank Act?

Fed. Res. can increase and decrease money by using the federal open market committee and buying and selling bonds. Selling bonds-gonna start decreasing the money supply by selling securities: open market operations by the federal open market committee. -Supervising 12 regional federal reserve banks -Regulating state member banks Also regulated by state. -Regulating all bank holding companies including any non-bank subsidiaries (mortgage companies)

What is the exception to the ECOA (Equal Credit Opportunity Act)? What is the test for whether the exception applies?

If the practice leads to a legitimate business need that cannot be reasonably accomplished that's less unequal in its impact or effect. Test to determine whether the exception applies is whether there is a demonstrable relationship between the creditor requirement (in most cases the required income level) and the creditworthiness for the level of credit involved.

What does the National credit union administration?

Issues charters and regulates federal credit unions Insures deposits at all federal credit unions and most state-chartered credit unions. Can be a state or federally chartered credit union.

What did the amendments of the McFadden Act do?

National banks could branch in home state. Inequality that existed between the branching rights of national banks and the branching rights of state banks. Prohibited to the same extent that state banks could branch in that state Whatever the state branch prohibited, national banks could do as well. Established competitive equality

What is money laundering?

Practice of engaging in financial transactions in order to conceal the source or destination of money Money laundering includes any financial transaction which generates an asset or value as a result of an illegal act.

What happens to the price of securities when there is a lot of selling?

Price goes down

As a result of gramm leach bliley, banks began affiliating with financial holding companies with these full service financial firms. Engaged in:

Proprietary trading Owning or sponsoring private equity funds or hedge funds

What is the general public policy rationale for denying powers to banking institutions?

Protect the particular industry from competition. Presence of deposit insurance. If banks are using their money to engage in risky activities, makes sense to prevent them from doing that.

How does a bank regulator evaluate the availability and effectiveness of a bank's systems for delivering retail banking service under the CRA?

The regulator considers the current distribution of the bank's branches among different income areas; the bank's record of opening and closing branches; the availability and effectiveness of alternative systems for delivering banking services such as ATMS, banking by telephone or by computer, and loan production offices in low-and moderate-income areas and serving low- and moderate-income individuals; and the range of services provided in different income areas and the degree to which the services are tailored to meet the needs of those areas.

After the subprime mortgage crisis, why did banks choose to sell mortgage back securities, which are technically bonds?

They are secured by underlying mortgages and associated cash flow from mortgages Investors received payments from the security as borrowers made payments on the mortgage loans. If subprime loans were part of the bond, then the expected rates of return on bond would be higher to compensate investor for higher risk of default on underlying mortgages.

During the economic crisis why did Investors feared TARP would not work quickly enough to ease credit crisis?

They believed it Would take too long to determine the value of the troubled assets.

How was subprime market structured so that lenders had incentives?

To make predatory loans and engage in predatory lending practices which resulted in defaults and foreclosures.

(true or false) Banks can hold a majority (greater than 50%) of the equity interest in their own subsidiaries

True

(true or false) The investment cannot exceed 10% of the bank's capital.

True

If you're not a US citizen can you be discriminated against by a bank?

Yeah. Wouldn't be a violation.

Do states have the same real estate investment restrictions as national banks?

Yes.

What is a hedge fund?

a.An investment fund available to institutional investors and sophisticated individuals that invest in a wife variety of investments. b.Make short term profits by buying and selling securities. c.Tend to use leverage to increase their returns. Using so much leverage and debt, so they tend to use aggressive (risky) investment strategies.

What does the Comptroller of the Currency do

a.Established under the National Bank Act OCC provides bank charters to national banks and federal Thrifts b.Works for the Office of the US treasury c.Issues federal charters for new national banks d.Promulgates regulations for national banks e.Supervises national banks through periodic on-site examinations f.Comptroller is appointed by president for 5-year term

How did Fannie Mae and Freddie Mac contribute to the financial crisis?

a.Owned or guaranteed over 5 trillion in mortgages b.Both realized significant losses due to defaults on securitized mortgages c.September 7, 2008- govt placed Fannie Mae and Feddie Mac under conservatorship of FHFA D. Treasury entered into preferred stock purchase agreement with fannie mae and freddie mac e.Treasyry can purchase stock fannie mae and freddie mac to ensure each company has a positive net worth. f.Treasury can purchase up to 200 billion from each entity g.US govt took over Fannie mae and Freddie Mac

what is the duty of loyalty?

acting in good faith and in the best interests of the corporation.

What is the duty of care?

acting with a level of care that an ordinary person in the same situation would use

What is the fifth step of calculating risk-based capital ratios?

add the total amount of the four risk weighted categories to determine the bank's risk weighted assets.

What does the National bank Act say?

except by the laws of any state being different is limited for banks under state laws, the rates that are limited will be under association or organized or existing in any such state. Courts have found that national banks can charge the higher rate in the state where it exists even if it's not located in that state.

Under CAMEL how does the NCUA (National Credit Union Administration) determine the capital adequacy requirement for credit unions and banks?

i.Examiners will determine whether there is sufficient capital to support the risks of the bank. ii.Examiners will consider management's ability to identify, measure, monitor, and control the risks to capital.

How do banks calculate assets?

liabilities + net worth or capital

What did the Regulation Q thrift differential do under savings and loan holding company act?

limited the rate of interest, paid on savings accounts. Thrifts didn't even need to apply, 1956 made thrifts paid ½% higher interest rate on savings deposits. Ex: Deposit account 3.5% for Bank A, incentivized to go to this thrift over Bank B which only has 3% interest.

What is divesting?

selling off a part of the business completely

What is the discount lending window?

-1. Addresses runs and panics by requesting a loan from the discount window Provides emergency liquidity to survive the run -2.Alternative sources of funding, such as borrowing from other banks in the federal funds market, tend to dry up during financial crisis. -If they run out of collateral then they cant borrow.

What would be the advantages and disadvantages if comptroller was to make formal findings of fact?

-1. Advantage: Provide the reviewing courts with sufficient basis of discretion. Moving things through the court more quickly. -2. Disadvantage: encouraging more judicial decisions. The person who was denied will have more to fight about, -3. Disadvantage: If two applications have similar findings of fact, precedent wll cause them to treat them the same.

What does Statute 12 USC Section 24 say about the business of banking?

-1. Business of banking -2. Powers necessary to carry on the business of banking -Mimics a financial instrument, financial intermediation function. Fits into the express function. Not going to be limited to the expressly enumerated powers. No 3 part test, more difficult to predict the outcome under the reasonableness standard. Is the Arnold Tours Test rejected or modified? Modified because of the footnote at the end. Would have come out the same. Arnold Tours test fits into reasonableness, but reasonableness is a more broad and flexible standard.

What are state chartered depository institutions?

-1. In determining whether the state-chartered bank can engage in the activity, first look at whether state in which the bank is chartered permits the activity. -2. State might expressly authorize activity or use a "Wild-card statute" A "wild-car" statute authorizes state-chartered banks to engage in any activity that national banks are permitted to engage in. -3. Once court determines that state has authorized the activity, court will look at whether there are any federal limits to the activity. -4. Under Federal Deposit Insurance Corporation Improvement Act (FDICIA)

What did the Fair debt collection practices act (1977) do?

-1. Prohibits a debt collector from using harassing or abusive practices in the collection of debts Debt collectors are prohibited from calling a debtor before 8 am and after 9 pm -2.Prohibitions are directed at third parties that collect debts for a creditor.

What is preemption?

-1. Supremacy clause in Constitution: Federal law "shall be the supreme law of the US" notwithstanding any contrary state law. -2.Congress has the power to regulate national and state chartered savings banks. Fed. govt could preempt state law when it comes to banking. -3. National banks are governed by state law when it comes to: Contracts-contract dispute between a bank and one of its borrowers. Purchase and sale of property. Debt collections. Bank has to abide by state law for debt collections Liabilities for debts that banks owe.

How does liquidity risk management work?

-1.Addresses runs and panics by implementing controls to manage liquidity risk -2.Interagency policy statement on funding and liquidity risk management Requires banks to implement internal controls to manage liquidity risks and perform stress testing i.Banks should have adequate levels of highly liquid marketable assets, ii.Banks should perform stress testing to determine what would happen to the bank's cash reserves and liquidity position in the event of changes in economic activity, asset prices, and interest rates. iii.Banks should develop a contingency funding plan to detail how the bank would respond to the event of a bank run or panic.

What do reserve requirements say?

-1.Addresses runs and panics by the requirement ot hold a minimum level of reserves to ensue the necessary funds are available to pay depositor withdrawals. -2.Reserve requirement. i.Banks must hold a minimum level of reserves to meet depositor withdrawals. ii.Reserve ration->banks must hold a certain percentage of deposits as reserves

What was the Fair Credit Billing Act (1974)?

-1.Applies to credit car accounts -2.Limits cardholder's responsibility for unauthorized charges to $50. -3.If cardholder notifies credit card company of an error on statement. Credit card company is prohibited from trying to collect disputed amount or any finance charges related to disputed amount while under investigation. -4.Credit card company is prohibited from closing or restricting account while the disputed charge is being investigated. -5.While bill is in dispute, credit card company is prohibited from reporting to credit reporting agency that cardholder is delinquent, but can report that cardholder is challenging bill.

What was the Flood disaster protection act of 1973?

-1.Bank must obtain flood insurance on property serving as collateral for A mortgage loan if property is in flood hazards covered by National Flood insurance program.

What is usury?

-1.Defined as charging interest above the legal limits -2.Based on state law -3.What is the public policy objective behind usury laws? a.Protects borrowers from being charged excessively high rates of interest b.Whether a debtor needs the protection of the usury laws may depend on the laws of the state.

Why was the period of 1980-2007 characterized as years of stress for banks?

-1.Deregulation of deposit interest rates Rise in inflation in the 1960s and 70s. Inflation is an increase in the crisis of goods and services at this time. When the demand is greater than the supply, the prices of the goods and services will go up. Will level off. The demand for goods and services can be greater than the supply. Alternatively, could have inflation as a reduction of supply, flooding killing wheat for farmers, inflation occurs because demand is high (ex) -2.Reduction of the supply in oil during this timeframe. So severe, it ended up causing a severe shortage in gasoline. Govt started rationing. Because of the sever shortage, if you had a license plate that ended in an even number, you could get gas on even days of the month. -Deregulation of deposit interest rates. A. Rise in inflation in 1960s and 1970s Drastic increase in interest rates-> prime rate above 21%. ^incredibly high. Paying 21% interest on a million dollar loan is a huge difference. All the interest rates were going up, so other types of investments like money market mutual funds. 4.-Disintermediation-> depositors withdrew funds from banks. -5.Money market mutual funds- relatively low risk but not FDIC insured. -6.Thrifts offered NOW accounts Checking account for consumers that pay interest.

What did the emergency economic stabilization act do?

-1.Enacted on October 3, 2008 -2.Prevent distribution and provide stability to the economic and financial system. -3.Secretary of Treasury was authorized to establish Troubled Asset Relief Program (TARP) to purchase troubled assets, including residential & commercial mortgages and MBS. -4.Secretary of the Treasury had authority to spend up to $700 billion to purchase the troubled assets. ^Issue: How easy would it be to determine the value of these troubled assets? -5.October 6, 2008-> Stock market plummeted more than 700 points and fell below the 10,000 for the first time in four years.

What did the Fair Credit Reporting Act (1970) do?

-1.Entitles consumers to access to their credit files kept by credit bureaus -2.A consumer may challenge any items that appear in the credit report and demand an investigation -3.Credit bureau must respond and, if inaccuracies exist, remove or modify the incorrect information -4,"Obsolete or outdated information must be deleted from a credit report

What are the basics for deposit insurance?

-1.Federally chartered depository insttituions (national banks and federal thrifts) Required to have federal deposits insurance under federal law. -2.State chartered banks and thrifts that are members of the federal reeserve Required to have federal deposit insurance under federal law. -3. State chartered banks and thrifts are not members of fed. Not required toi have a federal deposit insurance under federal law, but requiredn under state law to havd FDIC insurance. -4. Commercial banks and thrifts are insured by the Deposit insurance fund. Administered by the FDIC Must apply to FDIC ti obtain deposit insuranc.e -5. FDIC can suspend or terminate the insurance in the event of a.Signficant violations of federal law or B.issues regarding sound management. A suspension or termination of insurance rarely occurs. -6. Deposit insurance coverage is 250k per depositor insitution in each category of ownership

What is the Fair and Accurate Credit Transaction of 2003 (FACT ACT)?

-1.Intended to help consumers fight identity theft. -2.Consumer can review credit file once every 12 months without charge from the 3 major credit bureaus: Experian TransUnion and Equifax. -3.Creditors are required to provide consumers with early warning notice when negative information is provided to a credit bureau. -4.Consumers have the right to dispute sata in credit reports directly with the company that furnished the information.

What are some issues with bank management?

-1.National banks must have at least 5 directors -2.Every director of a national bank must be a citizen of the US -3. A majority of the directors of a national bank must be residents of the state where the bank is located. -4. Directors of national banks are required to hold stock in bank of $1k. State chartered bank- huge percentage of the net worth. -5. Insured depository institution or holding companies must provide 30 days advance notice to Federal regulator of proposed addition of any person to board of directors or as a senior executive officer if the institution or holding company: a.Is less than two years old b.Has had a change in control in the last two years c.Is not in compliance with minimum capital adequacy requirements. -6. Federal agency can deny proposal if competence, experience, character or integrity of that individual will indicate: Would not be in best interest of public to permit individual to be employed by deopostory institution or holding company

How and why is insider lending regulated?

-1.Public policy-> protect the safety and soundness of banks by preventing banks from investing assets in inappropriate ways. -3.Apply to all FDIC insured depository institutions. 4.Insiders of a bank are: Executive officers Directors Principal shareholders -5.Executive officer-participates or has authority to participate in major policymaking functions of bank Chiefs are considered executive officers along with the president. Vice president not included. -6.Principal shareholder. Owns, controls, or has power to vote more than 10% of any class of voting securities in a bank, but does not include the bank's parent company. 7.Director Sits on the board of directors.

What was the Expedited Funds Availability Act of 1987?

-1.Requires banks to follow schedules for the clearance and settlement of checks. -2.Purpose is to prevent banks from holding a check for a longer period od time needed for the bank to clear. .By holding a check for longer than necessary, bank could invest the funds and earn a "float" or interest on the funds during the period od time after check cleared and before bank credited funds to the customer's account. Not allowed anymore under EFAA and theres schedules now.

What was the Real Estate Settlement Procedures Act of 1974?

-1.Requires residential mortgage lenders to provide buyers of a home with a uniform settlement statement. Itemizes all costs and charges associated with purchase -2.Prohibits kickbacks that increase cost of settlement services.

What did the Dodd-Frank Act require for a BHC and a Savings and Loan Holding Company?

-A bank holding company or Savigns and loan holding company must: Serve as a "source of financial strength" for any subsidiary bank or thrift Holding company must be able to provide financial assistance of subsidiary bank or thrift is experiencing financial distress. -Federal reserve board can require a Grandfathered Unitary Savings and Loan holding company to: Establish an intermediate holding company to conduct financial activities. Be a "source of strength" to subsidiary intermediate holding company.

How are banks regulated under Basel III?

-Basel committee proposed a new framework known as basel 3. -Goal-banks will hold enough capital to be able to absorb losses as large as what banks experienced in the recent financial crisis and still continue to operate. -Banks will be subject to higher minimum capital requirements. a.Tier 1 risk based capital ratio=tier 1 capital/risk weighted assets increased to 6% b.New common equity tier 1 based capital rato=common equity/risk weighted assets=4.5% c.Banks will be required to hold an added capital buffer of 22.5 % comprised of common equity. Purpose is to ensure that banks maintain a buffer of capital to absorb losses during periods of financial and economic stress. If bank has losses that reduce the Buffer, bank will be required to take affirmative steps such as reducing dividends to restore the Buffer. d.The total common equity capital requirements will be 7%. e.New basel requirements focus on high quality common equity f.Basel III provides a new leverage requirement that includes off balance sheet items. The minimum basel tier 1 leverage ratio is 3%. g.Basel II provides for larger, systemically significant institutions to use their own internal risk ratings to determine the required amount of risk-based capital. As long as it's equal to or more than what the capital should be Called the advanced internal ratings based approach h.Basel III includes new liquidity management standards.

What are the primary functions of the Bureau of consumer financial protection?

-Collecting, investigating and responding to consumer complaints -Identifying risks to consumer and to the proper function of markets for consumer financial products and services -Issuing rules, orders and guidance to implement federal consumer financial laws. -Supervising and enforcing federal consumer financial laws for covered persons Any entity that offers or provides a consumer financial procut or service -Exclusive authority to examine insured depository institutions with more than 10 billion in assets and any affiliates. Primary enforcement authority for these entities. Other federal agencies-> back up enforcement authorities. -Used to just deal with the OCC and now they deal with OCC and CFPB. -Other federal banking agencies have examination and enforcement authority for banks and thrifts with 10 billion or less in assets. -Exclusive examination brokerage, or servicing of loans secured by real estate primarily for personal, family or household purposes. -Mortgage related Offering origination, brokerage or servicing of loans secured by real estate primarily for personal, family or household purposes. -Persons posing risk Covered person who generates consumer complaints. -Private education loan providers. -APY: Annual percentage yield. -Private education loan providers Offering or providing private education loans to consumers -Payday lenders Offering or providing payday loans to consumers Consumer writes a check dated the date of next pay date or consumer has its employer direct deposit to payday lender -Large participants of other consumer financial products or services markets. Larger participants of consumer reporting market Equifax, Trans Union, and Experian. Issues with payday lenders is if CFPB is looking in to them, they were gonna just close down and reopen

What is the rationale for small business investment company exception?

-Debt security and equity security part of the market? Equity market tends to be more volatile than the equity market. -Permitting banks to invest in highly risky venture capital enterprises. It's good public policy for the government to support small businesses. Can invest in up to 5% of your capital. -Usually a small business designation.

Why were thrifts failing everywhere across the country during the savings and loan crisis?

-Federal Home loan bank board permitted insolvent thrifts to rmain open. -Legislation broadened investment powers of thrifts. -Many thrifts that were initially insolvent due to the interest rate mismatch became even more insolvent as a result of making these highly risky loans. -It became so bad that the federal loan insurance corporation did not have enough money to pay out these failed thrifts across the country.

What did the Federal credit union act of 1934 do? What are credit unions anyway?

-Federal chartering of credit unions -Credit unions provided credit to workers and farmers. -One big difference between credit unions and banks, is that credit unions are nonprofit so they don't have to pay taxes. Banks are annoyed that they have to pay taxes

What was thrift legislation that came out of the Banking Act of 1933?

-Federal home loan bank system was established and headed by the federal home loan bank board -12 regional home loan banks Authorized to provide emergency liquidity loans. Subsidized long term funding Corresponding bank institutions

What is the penalty for violating the National Bank Act?

-If you knowingly charge a greater rate, the party can get back not only the amount they paid, but double the amount that they paid. A very stringent penalty. So banks have to make sure they aren't violating a usury statute in a particular state.

Why was the period of 1934-1980 regarded as the Years of Stability?

-Investment and commercial banking didn't have to compete because of Glass Steagall. -Branch banking States permitted branch banking Rescue mergers. (weaker banks could merge with stronger banks) Wouldn't be possible in a state that prohibited branch banking. So much easier Branch banking became popular, but branches could not open offices in more than one state.

What were the issues of mortgage backed securities?

-Junk loans were triple A, many of the mortgage backed securities were rated triple A despite being collateralized by subprime mortgages. -Potentially didn't know but could have known cuz it was in the prospectus.

What caused the banking crisis of 1929-1933?

-Lack of asset diversification and economies of scale -Bank failures -Stock market crash of 1929 -Increased bank failures in 1930 in the southwest and started a "contagion of fear" (widespread bank panics that lead to widespread bank failures). Everyone running to the bank to take their money out from 1930-1932. -Bank runs-> bank panics-> more bank failures. -Federal reserve increased the discount rate. -Money supply contracted-> Even more bank failures (When you reduce the discount rate, encourages banks to borrow.)

What are the two types of insolvency?

-Liquidity insolvency Entity can no longer pay its debts when they become due. -Equity insolvency Entity's assets no longer exceed its liabilities.

What is the difference between mutual funds and banks?

-Mutual fund is considered demand equity. -Therefore, a mutual fund is only gonna pay the depositor his/her proportional share. -Instead of $100 value, if the securities of that mutual fund goes down, then your share goes from worth of a dollar to 50 cents. -Contractually have to repay the customers a sum certain= to the customer's deposit. It's a debt due on demand.

What is net worth/capital and how do you calculate it?

-Net worth.capital is comprised of: Issued and outstanding stock Retained earning Calculated by the difference between assets and liabilities.

Do investors prefer liquid assets then?

-No. Because if you buy a house, you;re tying your money up. -Because there is a greater risk for a liquid asset, investors will demand a higher return on a riskier asset. The higher the risk, the higher the return on that particular asset.

What are syndicated loans?

-Originating bank sells participations in the loan to other banks. -Each of the participating banks shares proportionally in: i.Lending money ii.Receiving the loan payments. iii.Credit risk. Each of the banks must absorb its proportionate share of any less.

What were bank mergers under the National bank consolidation act of 1918?

-Permitted a national bank that converted fro state to national charter and kept its branches could merge with a national bank that had been a state bank with branches. -Mergers were a method of acquiring branches. Provided economies of scale. Closed unprofitable banks. Rescued failing banks.

What do balance sheets so?

-Reflects the financial condition of an entity as of a specific date. -Include a number of items, assets. Liabilities are what people owe to others. -Net worth or equity is the difference between the assets and the liabilities. Our assets-our liabilities=our net worth or equity Assets=Liability +net worth or equity

Which Glass steagall act prohibition did the Graham leag Bliley Act of 1999 repeal?

-Repealed anti-affiliation provisions of Glass-Steagall -Banks can affiliate through financial holding companies with full service financial firms Underwriting, dealing in, and brokering securities allowed for special qualified banks. Investment advisors allowed for special qualified banks. Merchant banking not allowed or special qualified banks.. Underwriting and selling insurance not allowed for special qualified banks.

What did the Financial institutions reform, recovery and enforcement act of 1989 (FIRREA) do?

-Replaced federal home loan bank board with office of thrift supervision. (OTS) -Created savings association insurance fund under FDIC to replace FSLIC. -Policies and overall culture of lack regulation and supervision continues. -Provided $50 billion to protect depositors. -Established the Resolution Trust Corporation which Closed insolvent thrifts and disposed of assets. -Required more stringent capital requirements and other safety and soundness safeguards for thrifts

Banks hold excess reserves to insure reserve deficiency. What is this?

-Reserve deficiency: bank reserves fall below the percentage required by law or bank reserves are insufficient to cover a withdrawal.

Do state banks have the same restrictions as national banks?

-Same activities restrictions as national banks -Unless: 1. Complies with capital adequacy standards 2. No significant risk to deposit insurance fraud. -5. Some activities are strictly prohibited. No exceptions for underwriting insurance (same restrictions as national banks

How are thrift investments different from bank investments?

-Thrfts capital standards and safety and soundness safeguards similar to banks -Thrift investments are still more restrictive. Secured or unsecure commercial loans. Cannot be more than 20% of assets. Commercial real estate loans Cannot be more than 4 times the amount of capital.

What is the qualified thrift lender test?

What os the public policy reason for wanting banks to use their deposits to make loans instead of investing in securities?

-Would want to make loans, want to provide credit. Bank's primary purpose is to provide credit. Another investment to make to earn more money. Provide loans to businesses and individuals and take deposits. Don't want banks to invest in risky investments

What is the Graham Leach Bliley Act of 1999?

-a.Contains financial privacy protections to protect the security and confidentiality of nonpublic personal information of consumer customers of financial institutions. -b.Prohibits banks from disclosing the nonpublic personal information of a consumer unless certain conditions are met -c."Consumers" are individuals who receive financial products from a financial institution that are used primarily for personal, family or household purposes. -d.Nonpublic personal information is personally identifiable financial information that is not publicly available -e.Bank must give its consumer customers a notice that contains The policies and practicies of the insitution regarding the protection and disclosure of public personal information. -f.Notice must provide the consumer with information about how to opt out of having nonpublic personal information disclosed to unaffiliated third parties -gBanks can use nonpublic personal information for their own purposes such as determining whether to grant a loan. -h. Banks can also share nonpublic personal information with affiliated institutions -i.Banks are generally prohibited from disclosing nonpublic personal information to a consumer customer to an unaffiliated third party unless: Bank provided proper notice and consumer did not opt out.

What are the drawbacks of deposit insurance?

-a.Depositors are less likely to worry about bank's financial strength. -b.Creates incentives for excessive risk-taking by owners. -c.Taxpayers end uo paying mistakes of the failed bank

What are the CRA tests for banks?

-a.Number and amount of home mortgage, small business, small farmer, consumer, and community development loans in bank's assessment areas. -b.Geographic distribution of these loans -c. Borrower's characteristics such as income level -d.Use of innovative or flexible lending practices to meet credit needs of individuals with low or moderate income -2.Investment test reviews a bank's record of helping to meet credit needs of its community through qualified investments that benefit its community. For example if a bank: a.Donates a branch located in a large minority neighborhood Sells the branch data below market price Provides the branch rent free of depository institution owned by minorities or by women -3.Service test reviews a bank's record of helping to meet credit needs of its community by evaluating a.Availability and effectiveness of a bank's systems for providing retail banking services b.Innovativeness and extent of its community development services.

What did the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 20001 (USA Patriot Act) do?

-a.Passed in response to September 11 terrorist attacks. -b.What it does: limits financial privacy protections for certain depositors or transactions that may pose a threat to US national interests. -c.Requires financial institutions to check the names of individuals wishing to open accounts against a list of known or suspected terrorists. -d.Foreign nationals must provide identification similar to the tax identification number provided by US citizens (Social Security number) -e.Intended to prevent money laundering through financial institutions.

Drug dealer sells drugs and receives $1,000,000. This is "dirty money" because it was received from illegal activity. What else are they likely to do during their money laundering escapdes?

-h. The drug dealer may try to launder the money by depositing it into various financial institutions (called placement) -i.Then, the drug dealer may wire the money out of the country to various foreign bank accounts in various names-> layering. -j.The drug dealer may then purchase assets, such as yachts, real estate or business investments with the money-> integration -k.The drug dealer may then sell the investments, and the proceeds of the sales may come back into the US economy as "clean money" that appears to be from legal transactions.

What is the economic function of banks?

. Financial intermediary a.Takes capital received from others, pools it together and invests it in other productive enterprises. b. Intermediated investment v. direct investment. The original supplier capital has a claim only against an intermediary. Intermediated investment- You only have a claim against the bank and not to the person the bank loaned the money out to. In contrast a direct investment is who you loaned to directly so you have a claim against them. 2. Offers transaction services that results in the transfer of wealth by means of bookkeeping entries. A. Accepting deposits, paying checks, and making loans. 3. Banks are financial intermediaries that offer transaction services.

What is Shareholders equity is comprised of?

.Facts: Issued and outstanding shares of stock expressed at par value Par value of shares is the nominal or face value of shares. Whatever the par value is of the shares, that is the set equity that cannot be dividended out. Limits the amount of dividends given to shareholders.

What is the arnold tours test?

1. Activities which are convenient or useful in connection with 2. One of the bank's established activities pursuant to 3. A bank's express powers under the national bank act.

First 6 and 8th power are basic powers that any corporation has:

1. Adopting and using a corporate seal 2. Continuation of the corporate existence 3. Making contracts 4. The right to sue and be sued, 5. To appoint directors and officers. 6. To create bylaws, and 8. Make charitable contributions.

The ability of a bank to create money is limited by 2 factors:

1. Banks operate under the principle of fractional reserve banking Banks need to hold a fraction of the amount of deposits as reserves to pay depositors that demand cash. 2.Specified percentage of all deposits must be held as reserves. Legal reserves a.Federal reserve bank deposits. b.Currency and coin in vault. legal reserves=required reserves+excess reserves. Required reserves Vault cash Federal reserve bank deposits Must be held to back the public's deposits. Excess reserves Vault cash Federal reserve bank deposits. Do not have to be held if back public's deposits.

What did the Glass steagall act-prohibit again?

1. Commercial banks from owing equity securities and underwriting and dealing in corporate securities 2.Affiliations between banks and securities firms 3.Securities underwriters from accepting deposits.

Why use a financial intermediary for your investments?

1. Diversification 2. Investment expertise 3.Economies of scale 4. Financial intermediaries can convert illiquid investments into liquid investments.

What is equity and debt?

1. Equity-> ownership interest in an asset or company 2. Debt-> what you owe to others.

What does the Change in Bank Control Act say?

1. If an individual is attempting to acquire shares of an FDIC insured depository institution-> Change in bank Control Act 2. Act defines "control" as the power, directly or indirectly, to a,Direct bank's management or policies or b.Vote at least 25% of any class of voting share 3. The individual must provide the bank's regulator: a.Personal history, business background and experience b.Fiancnail statements c.Terms of the acquisition d.Sources of funding e.Plans for any major changes->mergers or sales of assets. 4.Federal regulator may deny request to acquire the bank if: a.Acquisition would be anti-competitive v.Acquirer;s financial condition might jeopardize: Bank's financial stability or Prejudice interest of depositors c.Acquirer or proposed management's Competence Experience & Integrit

What did the Riegle-Neal Interestate Banking and Branching Efficiency Act of 1994 do?

1. Repealed dougllas amendment (which was that states controlled whether, and under what circumstances, out-of-state bank holding companies could own and operate banks within their borders) 2. BHCs can acquire banks in any state 3. BHC can merge acquired bank wit h a bank in another state Acquired bank can become branch of out-of-state bank. 4. Exception de novo (new) branches if: State expressly prohibited by statute. Montana has this exception on the books-can't force us to do this. Can't have competitive banks be filled with city banks and banks of america. 5. Permitted de novo (new) branches if: State expressly permitted by statute.

By what 6 qualifications does the lending test evaluate lending performance?

1. The number and amount of the bank's home mortgage, small business, small farm, and consumer loan in the assessment areas 2. The geographic distribution of the bank's home mortgage, small business, small farm, and consumer loans 3.The characteristics of the borrower, such as income or size of business. 4.Income levels 5.The bank's community development lending, including the number and amount of community development loans and their complexity and innovativeness 6.The bank's use of innovative or flexible lending practices to address the credit needs of low- or moderate-income individuals or geographic areas.

How did the OCC amend its rules regarding preemption and visitorial powers to implement those sections of Dodd-Frank Act after the Barnett Bank decision?

1.Applies the same preemption standard to Federal savings associations that applies to national banks->conflict preemption standard. 2.Eliminates preemption for subsidiaries of national banks and federal thrifts. 3.The "legal standard for preemption" used in the Barnett bank decision in conflict preemption. c.Includes "prevent or significantly interfere" language but is not limited by it. d.OCC will consider the entire conflict preemption analysis in the Barnett case when determining whether to preempt a state consumer financial law. Could point to anything in the Barnett Bank case. Doesn't need to prevent or significantly interfere, could do something else and point to something else in that case. e.Conflict that is analyzed is the nature and the scope of the impediment. 4.State attorneys general can bring enforcement actions in court to enforcement actions in court to enforce applicable law against national banks and federal thrifts. State attorneys general are restricted in conducting non-judicial investigations or oversight of national banks.

Why is capital important?

1.Capital reduces the risk of failure. a.The more a bank's assets exceed its liabilities, the greater the probability the bank can meet its liabilities as they come due and avoid default and failure 2.Capital reduces the incentives to take excessive risk. a.Asymmetry between limited downside risk and potentially unlimited upside gain creates a bias of shareholders toward greater risk-taking. b.Capital helps counteract the bias because the larger a bank's capital, the more its shareholders stand to lose if the bank fails. 3.Capital acts as a buffer in front of the deposit insurance fund and the taxpayers. a.Priority-> depositors, general creditors, subordinated debtholders, shareholders. b.Capital protects depositors before Deposit Insurance Fund is triggered. 4.Capital helps avoid credit crunches/crisis by: a.Reducing the risk of failure. b.Reducing incentivizes to take excessive risks. 5.Capital increases long-term competitiveness because it promotes economic efficiency by a.Reducing the risk of failure b.Reducing the incentivizes to take excessive risk.

Effects from change in federal reserve's discount rate: (Describe what the cost effect, substitution effect and the announcement effect are)

1.Cost effect. Decrease in the discount rate Increase in borrowing from the discount window Increase in legal reserves Increase in the money supply. Increase in the discount rate. Borrowing is less likely-decrease in borrowing from the discount window. Decrease amount of legal reserves in the economy Decrease in the money supply. 2.Substitution effect. Change in the discount rate changes other interest rates as well. Ex:April 2008 Federal reserve discount rate-2.25% Target federal funds rate 2.00% Prime rate 5% End of 2008 (rates reduced by 1.75%) Federal reserve discount rate 0.50% Target federal funds rate 0.25% Prime rate 3.25% Lower interest rates made borrowing more affordable Increase legal reserves Increases money supply. 3.Announcement effect: Discount rate and federal funds rate Indicators of federal reserves monetary policy Psychological impact on the financial markets If fed increases the discount rate or target federal funds rate Signals federal reserve wants tighter credit conditions Marekt responds by reducing borrowings Decreases legal reserves Decreases the money supply F Fed decreases the discount rate or target federal funds tate Signals federal reserve wants looser credit conditions Market responds by increasing the borrowings Increase legal reserves. Increases the money supply

What did the National Currency Act of 1863 (replaced by National Bank Act of 1864) do?

1.Created Independent National Banks 2.Created Uniform national currency 3. Installed the Comptroller of the Currency to power-> Regulator of national banks. 4. Implemented minimal capital requirements 5. Implemented reserve requirements-> based on a percentage of deposits.

If US financial institution maintains a correspondent account for a foreign bank and that foreign bank is Operation under an offshore banking license or Operating under a banking license issued by a country with money laundering concerns, the US bank has certain requirements, including:

1.Determining the identity of the owners of a foreign correspondent bank that is not publicly traded and 2.Conducting enhanced scrutiny of the correspondent account to prevent money laundering.

How were the powers of the Federal Reserve expanded by the Dodd Frank Act?

1.Examination authority for a designated nonbank financial company and any of its subsidiaries Ex: General electric had GE capital, which was a nonbank that just made loans. Prior to Dodd Frank, Federal Reserve had no authority over them, and after Dodd Frank they did have authority. 2. Enforcement authority for a designated nonbank financial company and any of its subsidiaries (other than a depository institution) 3. Back up enforcement authority for the depository institutions 4.Nonbank financial company Defined as you are predominantly engaged Predominantly engaged in financial activities. 5. Predominantly engaged means either 85% or more of its annual consolidated gross revenues from financial activities OR 85% or more of its consolidated assets relating to financial activities. 6. Designated based on whether material financial distress at company could pose a threat to financial stability of the US

What are some asset growth restrictions on an undercapitalized institution?

1.Institution has an approved capital restoration plan 2.Asset growth complies with the plan and 3.Institution's capital ratio increases at a rate that would permit the institution to become adequately capitalized within a reasonable time.

Why is it so hard to form a bank?

1.Issuance of bank charter is discretionary with regulators. Issuance of general corporate charter is not. Why? Easy to open a corporation, in contrast no guarantee that a bank charter will be granted. a.Despositors cannot adequately protect from unscrupulous banks because: i.Depositors cannot monitor what happens to their depositors. ii.Banks keep a large portion of their liabilities in highly liquid form (cash)-> easy for management to steal. iii.If there is a strong possibility that organizers will engage in fraud, regulators need discretion to deny a charter. b.Banks are highly leveraged. As a result, those losses are going to quickly erode the small amount of equity and cause bank to fail. Why do we care if banks fail? i.National economic need to protect stability of the banking system. Money supply Availability of credit and liquidity. ii.Federally sponsored deposit insurance. c.Banking is a highly regulated industry and chartering process is necessary to ensure compliance with all of the regulations. 2. Dual federal/state system for issuing bank charters. Whereas a regular corporate charter is just a matter of state law.

Do mutual funds meet any of the three legal defintions of a bank?

1.Mutual funds have no federal or state charter to operat commercial bank Neither prongs Not insured by fdic Accepts demand deposits, but not make commercial loans 2.Does not meet the services def Accepts demand deposits Do not make commercial loans 3.Meets economic function def Financial intermediary Provides transaction services through demand accounts.

What were the main issues with the Federal Reserve Act of 1913?

1.No-par banks-> exchange charges (bundles of checks exchanged at a local clearinghouse) Clearinghouse- went to this place and cleared their checks. Some checks passed through several banks without reaching their destination. Fee calculated at par value, and refused to honor the checks, they would charge this exchange charge, The difference was the exchange charge was used to avoid exchange fees. Delay in clearing checks- exchange charges cost huge inefficiency. New national checks were introduced. 2.Recurring liquidity crises caused financial panics. People would also invest the money in securities at this time. When there's a lot of buying of stock, the demand increases the cost of the security and this was happening everywhere at this time. In order to get the money back, they have to sell the securities and prices decline. Caused a massive forced selling of these bank-held securities, followed by panic selling.

Why are banks considered special from other businesses?

1.Safety and soundness. A. Banks are susceptible to runs and panics. B. Banks play a central role in creating and destroying money and in increasing or decreasing the money supply C. Banks play an important role in the payments system. 2. Consumer protection reasons. A.Banks provide essential services to individuals. Ex: Checking accounts, loans. B. Consumers lack information. May not understand they're not getting proper safety for their deposits and they're not being insured. Required to provide disclosure info to clients. C. Social policy of protecting consumers. 3.Law enforcement A. Fraud B. Money laundering C. banks assist in law enforcement matters.

What are the elements of the ATR requirement for banks that are allocated in the CFPB (Consumer Financial Protection Bureau) QM (qualified mortgage) rule?

1.The borrower's maximum monthly payment must be no more than 43 percent of the borrower's monthly income at the time of the initial loan. 2.The loan must not include an "interest only" period in which the borrower pays only interest but doesn't pay down the principal of the loan. 3.The loan must not include a "negative amortization" feature in which the principal of the loan increases over time. 4."Balloon payments"-usually large payments at the end of the loan term-are generally prohibited. 5.The loan must not have a term of more than 30 years. 6. Upfront points and fees are generally capped at 3 percent of the loan. The QM rule doesn't provide absolute protections for lenders, but rather allows the lender to "presume" that a qualifying mortgage meets the ATR rule.

What percentage of interest, tax and loss did the National Bank (1863-1864) impose?

10% tax on state bank notes imposed to encourage state banks to convert to national charters. Interest was 7% and a loss was at 3%

-Loan amount is $1,000,000 -Equity amount is $0. -Declining property values Appraised value is $700,000. Loan amount is $1,000,000 Equity amount is $0. What is the loan to value ratio?

100%

Suppose there is 100,000 loan There are 4 banks in the syndicate Each bank lends 25000 Each bank holds a 25% participation in the loan. How many losses would each bank absorb?

25%

What are some rules a bank must follow when associating with a hedge fund or private equity fund?

4.Obligations or performance of the hedge fund or private equity fund are not guaranteed assumer or otherwise covered by the banking entity or subsidiary or affiliate of the banking entity. 5.Banking entity does not share the same name or variation of the same name with the hedge fund or private equity fund 6.No director or employee of banking entity takes or retains an ownership interest in the fund, except for any director or employee who provides investment advisory or other services to the fund. 7.Banking entity discloses to investors in writing that losses to fund will be borne by investors and not by the banking entity

Suppose a bank has 100 million in capital and wants to make a loan of 20 million to one borrower. How much will the bank need in readily marketable collateral?

5 mil. Bank can lend 15 million unsecured or secured by non marketable collateral Remaining 5 million must be secured by readily marketable collateral

How much capital and surplus can community development. projects exceed in the aggregate?

5 percent of capital and surplus.

What entity meets the three definitions of.a bank?

A Commercial bank does (ex: keybank) Meets the three legal defs of a bank 1.Federal or a state charter to operate as a commercial bank Meet both prongs of the bank holding company act def: General insured by FDIC Accepts demand deposits and makes commercial loans. 2.Meets the services def of a bank 3.Meets the economic function of a bank.Financial intermediary Provides transaction services through demand accounts.

What are bank holding companies?

A bank holding company is a corporation that owns a controlling interest in one or more banks but does not itself offer banking services. Holding companies do not run the day-to-day operations of the banks they own. However, they exercise control over management and company policies. They can hire and fire managers, set and evaluate strategies, and monitor the performance of subsidiaries' businesses.

What are standby letters of credit?

A bank may issue of a standby letter of credit backing or guaranteeing municipal bonds issued by the City of Syracuse. i.City of Syracuse is the Account party. ii.Bondholders are the beneficiaries on the letter of credit. Want it to be backed by letter of credit to guarantee payments to the bondholders. iii.Bank would be required to pay the bondholders only if the city defaults on its payments to the bondholders. Iv. Possibility that the city will default and bank will have to pay on the standby letter of credit is considered too uncertain and remote to list the obligation on the bank's balance sheet. v.Off-balance sheet item would be shown as a contingent liability in the notes to the financial statement. vi.This standby letter of credit would not be included in the calculation of the bank's leverage ratio.

What happened during Industry consolidation (ie. branch banking by state banks during 1914-1933)

A bank with branches could: Realize economies of scale $10 cost/ 5 checks=$2 per check Vs. $10 cost/ 10 checks= $1 per check. Is it the same fixed cost? No because the cost per item goes down. Ir provided consumers with economies of scale and allowed banks to diversify its asset portfolio. If you have branches everywhere, amount you're making will offset the cost going down. Lastly, it permitted customers to use the same bank in different areas

A bank's total covered transactions with any one affiliate cannot exceed 10% of bank's capital stock and surplus. Why?

A covered transaction is when a bank: Extends credit to an affiliate Issues a guarantee for the benefit of an affiliate Purchases assets from an affiliate Accepts securities issued by an affiliate as collateral for an extension of credit to anyone; or Invests in securities issues by an affiliate Ex: If the bank issues bonds, the bonds would be a covered transaction. Banking entity cannot enter into a transaction with a hedge fund or private equity fund if it's one of the covered transactions Obligations or performance of the hedge fund or private equity fund are not guaranteed assumer or otherwise covered by the banking entity or subsidiary or affiliate of the banking entity.

What did the Riegle Community Development and Regulation Improvement Act create in 1994?

A fund that can support community development financial institutions, defined as nongovernmental entities whose primary mission is to promote community development, serve a low-income area or targeted population, provide development services in conjunction with equity investments or loans, and maintain accountability to residents of its targeted area or population.

What is foreclosure?

A legal proceeding that "forecloses" the equity of redemption. Historically, the equity of redemption was the right of the homeowner, as the holder of equitable title, to tender the amount due and recover possession of the property even after being rejected for failing to pay on a mortgage loan. The equity of redemption represents a cloud on the title of anyone who purchases property after a default. To eliminate this problem, the law long ago gave the lender the right to bring an action to "foreclose"-i.e. extinguish- the equity of redemption. After the equity of redemption is foreclosed, the property can safely be sold to satisfy the debt because the purchaser takes title free and clear of any equities of the homeowner (although state law may provide statutory redemption period after foreclosure)

What are mortgage originators?

A mortgage broker or bank loan officer who engages in activities preliminary to the extension of credit, such as taking mortgage applications, assisting the consumer in applying for credit, arranging in the transaction in which the credit is extended, negotiating over credit terms, referring the consumer to a creditor or another loan originator, or extending the initial loan. Some mortgage originators are affiliated with institutions that held loans until maturity. Often, however, they are firms or individuals who arrange for the loan but then sell it to other lenders or to special purposes vehicles that issue mortgage backed securities.

To establish liability under a wrongful foreclosure tort what must be demonstrated to support the individual's argument that no breach of condition or failure of performance existed that would have authorized foreclosure?

A mortgagor must show that she tendered the full amount of the debt (ie. returned or payed back the money borrowed) and was rebuffed. It may also be necessary that the plaintiff establish that she was wrongfully ejected from the premise as people who are still living in the homes may find themselves without relief.

What are mutual funds?

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. -Demand equity shares. Sells shares of mutual fund and can be readily redeemed. Value of each share is determined by the total value of the pool. -If you have two shares, you have two dollars worth of the mutual fund. -Provides transaction services through demand accounts.

What does the incidental powers clause say?

A national bank shall have power to exercise, "all such incidental powers as shall be necessary to carry on the business of banking." This clause has 2 regions of power: 1. The business of banking strictly construed, 2. The powers "necessary" to carry on the business of banking. Logically broader than just the business of banking. The clause continues: "-by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of febt; By receving deposits. By buying and selling exchange, coin and bullion. By loaning money on personal security By obtaining, issuing and circulating notes." Powers don't seem to be incidental to the business of banks. If these are the incidental powers, then perhaps we should look as congress intended by merging the incidental powers with business of banking powers. Congress might have intended for them to have only incidental powers.

What is the difference between a recourse and a non-recourse loan?

A recourse loan allows a lender to pursue additional assets when a borrower defaults on a loan if the debt's balance surpasses the collateral's value. A non-recourse loan permits the lender to seize only the collateral specified in the loan agreement, even if its value does not cover the entire debt.

Why were subprime mortgages bad and lead to the subprime mortgage loan crisis of 2007?

A subprime mortgage is one that's normally issued to borrowers with low credit ratings. A prime conventional mortgage isn't offered, because the lender views the borrower as having a greater-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a much higher rate than on prime mortgages to compensate for carrying more risk. These are often adjustable-rate mortgages (ARMs) as well, so the interest rate can potentially increase at specified points in time. As a result, Subprime borrowers could not qualify for a prime loan. Subprime mortgages defaulted much more frequently than prime loans.

What activities does the Comptroller consider to be part of the business of banking?

A. Activities considered in accidental to the business of banking include: I. Providing software to enable merchants to design their websites is part of the business of banking if limited function, or incidental to the business of banking if full function. Ii. Calculation of sales taxes owed by merchants on their internet sales. Iii. Building websites for the merchants. B. Activities considered part of the business of banking include Finder activities such as: Hosting of commercial websites. Providing links from their websites to websites of subscribing merchants. The finder function is a permissible banking activity that includes brining parties together for transactions the parties themselves negotiate and carry out. Processing of payments from oders through a merchant's bank-hosted website Providing merchants with reports on empirical data such as site hits and transaction volume Providing billing services Providing internet merchant hosting services to other financial institutions for resale to their merchant customers Modern correspondent banking function.

What did the Community Reinvestment Act of 1977 do?

A. Required insured depository institutions to make an "affirmative effort" to meet credit needs of low and moderate income customers including households, small businesses, farms and ranches. b.Requires regulatory agencies to asses records of banks and thrifts in meeting credit needs of entire community including low and moderate income neighborhoods consistent with safe and sound banking operations. c.Requires regulators to take into account a CRA record in reviewing applications for deposit facilities: i.Mergers and acquisitions ii.New charters iii.Deposit insurance iv.Establishing a branch v.Relocating a branch or home office. d.Bank determines its own assessment area subject to approval of the regulator. A bank's assessment area needs to include its: i.Main office ii.Branches iii.ATMs iv.Surrounding areas where bank has made a sizeable number of loans e.Assessment area cannot exclude low or moder income areas

What Is a AAA Credit Rating?

AAA is the highest possible rating that may be assigned to an issuer's bonds by any of the major credit rating agencies. AAA-rated bonds have a high degree of creditworthiness because their issuers are easily able to meet financial commitments and have the lowest risk of default.

What about MBS issued by investment banks? Why did they receive AAA ratings in the senior tranches?

AIG (American International Group) offered credit default swaps on certain tranches of MBS that were backed by subprime debt. Credit default swap is a derivative that is purchased to hedge against the risk of default. Credit default swaps provided insurance against default on MBS Basically buying insurance; similar to Fannie Mae and Freddie Mac providing a guarantee; investment banks provided credit default swaps This credit enhancement gave the MBS a AAA rating Believed the bank could repay it. Similar to credit worthy bond security which was expected to pay the interest on the security.

Lowest or riskiest tranche->subbordinate tranche. Why are the tranches set up this way?

Absorbed the first defaults in the pool of mortgages Intended to insulate highest or senior tranches from default

Comptroller would permit national banks to hold a minority in sub if:

Activities if the subsidiary are connected to activities part of or incidental to the business of banking. ii.Banks must have the power to either prevent the subsidiary from engaging in activities that are not part of, or incidental to, business of banking, or withdraw its investment. iii.Bank's liability is limited to the amount of its investment. iv.Investment in subsidiary must be convenient of useful to the bank

To remove an IAP, the misconduct must cause:

Actual or probable financial loss or other damage to the bank Actual or possible prejudice to the bank's depositor Financial gain or benefit to the IAP

What is the procedure for if a bank discriminates against an individual?

Agency serves IAP (institution affiliated party) with a notice regarding the agency's intention to remove or prohibit the individual IAP has a right to a hearing before an ALJ ALJ provides factual findings and legal conclusions to agency Agency determines whether to remove or prohibit IAP IAP can have the decision reviewed by a court under the Administrative Procedure Act.

Banks can invest in real property to promote the public welfare, including welfare of low & moderate income communities or families. What is the limit of capital?

Aggregate investment in this type of property cannot exceed 5% of capital, unless approved by the OCC up to 10% of capital

What was the nationwide bank holiday?

All banking activity suspended for 4 days during the banking crisis. Half the banks in US failed.

What public policy benefits might be obtained if new banking services are permitted?

An increase in competition-> benefits purchasers of the services.

What is section 1412 of the Dodd Frank Act's safe harbor for lenders in the form of a rebuttable presumption?

Any creditor with respect to any residential mortgage loan, and any assignee of such loan subject to liability under this title, may presume that the loan has met the requirements of subsection a, if the loan is a qualified mortgage.

What did the Dodd-Frank Act do to the FDIC?

Back-up examination authority was expanded to cover Nonbank financial companies supervised by Federal Reserve Board Bank holding companies with 50 billion or more in assets. Back-up enforcement authority was expanded to cover any depository institution holding company Acts as receiver Winds up the affairs of the institution and used the assets to pay creditors Acts as conservator Operates problem institutions as a going concern until problems are solved.

What was the new holding company regulation under the Banking Act of 1933?

Bank Holding Company needed a permit from federal reserve board to build and vote stock in a subsidiary member bank What if the subsidiary bank was not a member of the federal reserved Bank didn't have to be in the federal reserve- you're gonna choose a bank as your subsidiary that is not a federal reserve. Created an inappropriate incentive. If subsidiary not a member bank, then no permit needed. One-bank holding companies were exempt.

-Why are banks so much more highly leveraged than industrial companies?

Bank can forecast return on assets ,more accurately than industrial firm Banks lend money under specified terms. There is a risk of default for those banks on those loans. Risk of industrial harm Recessions (banks also have that but sometimes recessions are where banks do the best because as long as they enforce their guarantees New competitions. Changes in technology Changes in consumer preferences

What is Section 16 of the Glass-Steagall Act about purchasing equity?

Bank is not permitted to purchase equity for its own account Dealing in securities is limited to purchase and selling securities without recourse, solely upon the order, and for the account, of customers, and not for the Bank's own account. Banks cannot underwrite securities because of the risk to it. If they underwrite and try to purchase the issue and the issue fails, will have a huge loss there.

Which banks should be blamed for the subprime mortgage crisis?

Banks and thrift lenders and independent mortgage companies. Blamed for predatory loans and predatory lending practices. Ex: countrywide financial State sued countrywide financial for alleged predatory lending practices Lenders secretly inflated income of borrower Countrywide financial owned countrywide bank (thrift) and countrywide home loans (mortgage company) Nation's largest residential mortgage lender Purchases by Bank of america in July 2008 to avoid bankruptcy Ex2: Ameriquest Independent mortgage company Largest subprime lender in the country until it began closing offices in 2007 and was acquired by Citigroup in 2008 Originator of the stated income liar loan (aka liar loans) People would write down their incomes and nobody checked. States sued Ameriquest for alleged predatory lending practices Major issue for mortgage companies-> lenders paid on commission

National banks are restricted repurchasing their own securities. What is the exception?

Banks are permitted to acquire their own securities to prevent losses on existing loans.

When is a bank obligated to file a SAR?

Banks are required to filed Suspicious Acticity Reports (SARs) when a bank believes a transaction is relevant to possible violation of any law or regulation. A bank is required to file a report if the transaction involves or aggregates at least $5,000 and the bank knows or suspects that i.The transaction involves funds derived from illegal activites or is intended or conducted to hide or disguise funds derived from illegal activities ii.Transaction is intended to evade the requirements of the BSA, or iii.Transaction has no apparent lawful purpose or is not the kind of transaction the particular customer would be expected to conduct.

What are the rules of Bank purchases of debt securities?

Banks can still invest in debt securities, but banks can no longer engage in proprietary trading of debt securities. Banks cannot take positions in securities principally for the purpose of selling in the near term to profit from short term price movements. Securities must be held for at least 60 days

What did Section 21 of the Glass-Steagall Act prevent? What are the exceptions?

Banks cannot own equity securities or underwrite securities Banks can deal in securities only for the account of customers Securities firms cannot take deposits. Banks are permitted purchase for their own account, underwrite, and deal in US govt securities and general obligations of state and local governments. General obligations: Debt securities that state or local governments have a general obligation to repay Government's "full faith and credit."

What is the dual banking system?

Banks get to choose if they want a state or federal regulation

What does 12 USC section 371 say about loans secured by real property

Banks have the power to make loans secured by real property

What are "Know your customer" requirements?

Banks must assess their client's financial patterns and set guidelines that would be triggered for unusual transactions

How were mortgage originators involved in the housing bubble of the early 2000s?

Because mortgage brokers originated the loans must did not expect to hold them, they were largely indifferent ti the borrower's risk of default. Their principal concern was often to make the loan and pocket the associated fees. During the years of the housing bubble, thousands of new mortgage originators entered the industry; many of these people were straight out of college, had essentially no background in real estate, and were interested in making as much money as they could as quickly as possible. Not surprisingly, many of the loans they originated turned out to lack documentation, to create obligations the borrowers could not repay, or to be simply based on frauds in the application documentation. A high percentage of these loans went into foreclosure when the housing bubble burst.

How should credit rating agencies, such as Moody's and S&P be blamed for the subprime mortgage crisis?

Blamed for assigning a rating to MBS that turned out to be either incredibly overly optimistic or just plain wrong Conflict of interest (for bond ratings) Credit rating agencies were being paid more for the higher rating; ex: paid a percentage on a million dollars. Higher rating=higher percentage Ex: One credit rating agency would say Triple B junk bond, would go down the street to another credit rating agency which would give a AAA rating (would encourage repeat business) Credit rating agencies are still doing the same thing. Saying that their ratings are opinions which are protected by freedom of speech. Have a huge corner on the market to give these credit ratings. Under Dodd Frank, banks have to come up to with their own individual ratings, but can still point to the credit rating for a credit rating agency. Weird thing: equity rating agencies can get sued.

Why did the real estate market slow after the housing bubble burst?

Borrowers speculating in real estate could no longer flip or Sell the property for a higher price or even for the original Purchase price before interest rate on mortgage re-priced to a higher rate. In an appreciating market, individuals who had trouble making their mortgage payments could refinance and us the additional equity in their homes to make their mortgage payments.

A mortgages are not as risky as subprime mortgages but risker that prime mortgages (also referred to as A paper). Why was this the case?

Borrowers typically had a clean credit history Borrowers did not have to document their income Debt to income ratio was higher than with a prime mortgage Loan to value ratio on the mortgage was higher than on a prime loan. Sometimes as high as 100% or more.

What did large commercial banks and thrifts do during the subprime mortgage loan crisis?

Bought AAA rated mortgage-backed securities. Subprime borrowers stopped paying on underlying mortgages Investors stopped purchasing securities Subprime mortgage market collapsed. Many mortgage-backed securities became worthless. Banks and thrifts lost money.

Federal reserve regulates amount of high-powered money by:

Buying and selling securities on the open market. Open market purchases of securities Increadses legal reserves (high-powered money) Reduces the federal funds rate Increases ability to make loans and create depotis Increases the money supply Open market sale of securities Decreases legal reserves (high-powered money) Increases federal funds rate. Reduces ability to make loans and create deposits Decreases the money supply.

What were senior tranches were first in line to receive?

Cash flow from the underlying mortgages These mortgage backed securities are debt securities that pay quarterly interest. Collateral in the event of default Received investment grade ratings gom credit rating agencies, sometimes AAA ratings, even though CMO may be entirely backed by subprime debt.

What did the Federal Reserve Act of 1913 do?

Caused there to be no central bank. Instituted no check clearing services Had no lender of last resort Did not regulate the money supply.

Banks are considered different from all other businesses

Central role of banks in: In creating and destroying money Increasing or decreasing the money supply. Money supply Currency in circulation Checking accounts Currency Serves as a medium of exchange Store of value. Checking accounts Medium of exchange. Store of value. Banks create money by lending it out and that money is deposited n a checking account or becomes currency in circulation,

What is a NOW account or a Negotiable order of withdrawal?

Checking account for consumers that pay interests (since the Banking Act of 1933 prohibited paying interest on demand deposits gave the federal reserve board the ability to regulate the rate of interest on reserve accounts) Bank ad to provide a notice of 7 days before paying out Banks could pay interest in this checking account. Basically was payable on demand Also for corporate accounts, bank developed sweep accounts

During the timeframe of the civil war to the Reserve Act, what were the major changes?

Checking accounts replace bank notes. State banks outnumber national banks due to the lower capital requirements, lower restriction requirements, and lower loan requirements. Dual banking system Bank charters are granted by both federal and state authorities.

How was the market segmented after the civil war?

Commercial banks were competing with Thrift institutions, which addressed needs of ordinary citizens. Savings and loan-mortgage loans were used to houses. Savings banks Savings and loans (aka building and loans) were owned by their depositors and not shareholders. Initially, they were set up as mutual entities where depositors are their owners. Over time they converted to be owned by shareholders.

How are the powers of banks separated?

Convenient or useful Established activities Express power -Brokering annuities -Brokering financial -Financial intermediary Investment instruments (takes deposits and makes loans)

How does the federal reserve regulate the money supply?

Coordinate open market operations. Buying and selling US govt and other securities on the market. Purpose: To achieve a certain quantity of reserves. To achieve a certain desired price for reserves-> means the federal funds rate. -Federal reserve purchase of securities will increase the reserves of the banking system. Those securities are leaving the market, federal reserve putting money into the economy so as a result of that purchase by the securities by the federal reserve will increase the reserves. When we have an increase of supply of the money in the economy, the federal funds rate tends to go down. Will reduce the federal funds rate. Will also increase the ability for banks to make loans and create deposits because there's more money. Increase grown of money and credit.

ow is hosting a website a finder activity?

Directs people to where they're advertising. Building a website is incidental to the business of banking, functionally interchangeable. Building websites still seems to be outside of the financial loan The OCC says there is a strong merchant demand, and their competitors will be offering a website building services. Could it be an incidental power? Yes. Lots of flexibility and gray.

What are the additional standards of the for the Mortgage Reform and Anti Predatory Lending Act?

Disclosures required on negative amortization loans Prepayment penalties prohibited on any residential mortgages other than fixed rate qualified mortgages. c.Arbitration clauses and financing of credit insurance are prohibited d.Negative amortization mortgages to first time borrowers are prohibited unless independent credit counseling is received e.Six months prior notice is required for interest rate resets on hybrid ARMs i.Fixed interest rate for an introductory period that later resets to an adjustable rate (2/28, 3/27 mortgages) IE.Fixed interest rate that later resets to an adjustable rate Vlocker rule: banks have more restrictions on securities (people say that banks went overboard with regulation on securities; moreso the issue was these subprime mortgages which caused the financial crisis)

What is really underlying the community reinvestment rules? What is the government trying to prevent?

Discrimination No opportunity for cease and desist order. No enforcement opportunities for th regulator.

What is the effects test under the ECOA (Equal Credit Opportunity Act)?

ECOA may prohibit a particular practice by a creditor that has a disproportionate negative impact or "effect" on a protected class even if the creditor had no intent to discriminate and the practice itself appears to be neutral on its face.

In addition to prohibiting discrimination, credit applicants in their protected classes, what else does ECOA prohibit discrimination against? What other situation? (Hint: has to do with marriage)

ECOA prohibits lender from requiring the co-signature of spouses when granting loans to qualified applicants. Idea is if a man goes in to get a loan, wouldn't ask for the wife's signature. Discriminating against wives.

What did the Dodd-Frank Wall Street Reform and Consumer protection act of 2010 do to National Banks?

Established de novo branch in any state to the same extent that state banks may open a new branch in that state Subject to any state imposed intrastate branching limitations "Home office protection" statutes. If another bank was in the small town, another bank could not go into this small town.

What did the Federal Reserve Act of 1913 do?

Established the federal reserve system 12 federal reserve banks- stocks owned by member banks. Both had a federal reserve board and a federal reserve bank. Member banks required to hold specified deposits as reserves either by: Cash in bank's vault or Account at federal reserve bank. Federal reserve bank provided check clearing services and lender of last resort

What is the lending test?

Evaluates a bank's record of helping to meet the credit needs of its assessment areas through its lending activities by considering a bank's home mortgage, small business, small farm and community development lending.

Under CAMEL how does the NCUA (National Credit Union Administration) determine the management requirement for credit unions and banks?

Examiners will determine whether the board and senior management provide appropriate oversight and effectively control the risks of the bank. Appropriate policies controlling the risk will be assessed. Examiners will consider the board and management's ability to identify, measure, monitor, and control the risks to the banks.

In March 2008, Bear Sterns, a major investment bank that held large positions in MBS backed by subprime debt. How did this contribute to the financial crisis?

Experienced a run on the bank

What was the problem of a very large bank during the Savings and Loan Crisis (1980-1989)? ex: -150k in checking account. -100k insured. -50k uninsured-paid to depositor.

FDIC very worried that if these large banks failed and they didn't pay out all of their money, they would start running at that bank or another bank. It could lead to the potential collapse of the financial system.

What are the facts and rule from Independent Insurance Agents of America v. Ludwig

Facts: Appellants, insurance trade associations, filed an action against appellee Comptroller of the Currency, a federal agency, arguing that the Comptroller had exceeded its statutory authority in its interpretation of the National Bank Act (National Bank Act), 18 U.S.C.S. § 92 (1978). The Comptroller interpreted the statute to suggest that insurance sales were not restricted by geographical regions. The district court granted the Comptroller's motion for summary judgment. In an earlier decision, the Court of Appeals for the District of Columbia reversed on the ground that Congress had repealed § 92 in 1918; hence, there was no legal authority to support the Comptroller's ruling. The United States Supreme Court found that section 92 had not been repealed and remanded the case back again to Court of Appeals. Rule: In examining an agency's interpretation of a statute, a court searches for an unambiguously expressed intent of Congress that addresses the precise question at issue. If a court finds such an intent, that is the end of the matter; the court must enforce it. If a court does not, it must defer to the agency's interpretation so long as it is permissible.

What are the facts and rule from Securities Industry Association v. Comptroller of the currency

Facts: In June 1982, Union Planters National Bank of Memphis ("Union Planters") applied to defendant , C.T. Conover, the Comptroller of the Currency ("Comptroller"), for approval of the acquisition by Union Planters of Brenner Steed and Associates, Inc., a discount brokerage business. In July 1982, Security Pacific National Bank ("Security Pacific") applied to the Comptroller for approval of its proposed establishment of a new operating subsidiary to provide discount brokerage services. Both discount brokerages would buy and sell securities solely as agent, on the order and for the account of customers. The Comptroller approved the applications. Thereafter, plaintiff Securities Industry Association ("SIA"), a national trade association representing hundreds of securities brokers, dealers and underwriters, filed a lawsuit against the Comptroller in federal district court challenging the decisions to approve the applications. The parties filed cross-motions for summary judgment. Rule: A court gives great weight to the Comptroller of the Currency's ruling. Reasonable constructions of regulatory statutes by the agencies charged with enforcement of those statutes are to be respected by reviewing courts. Glass-Steagll act does not prohibit national banks from owning securities engaged in the brokerage of business. Brokerage of securities not limited to existing customers. -Providing advice is part of or incidental the business of banking. -An underwriting involves a distribution of securities. Distribution: the process of selling securities to public investors. Does an underwrite include private placement of securities? No. If an underwriting is a public placement, a private placement is not included.

What are the facts and rule from camp v. pitts?

Facts: Pitts, et al., hereinafter respondents, applied to Camp, the Comptroller of the Currency for a certificate authorizing them to organize a national bank in Hartsville, South Carolina. On the basis of information received from a national bank examiner and from various interested parties, the Comptroller denied the application and notified respondents of his decision through a brief letter. According to the Comptroller, his decision to deny the respondents' application was grounded on the fact that the community already was adequately served by other banks, and as such, there was no need for the proposed national bank. In the United States District Court for the District of South Carolina, the respondents sought review of the Comptroller's decision. Holding that there was substantial basis for the Comptroller's decision and that it was neither capricious nor arbitrary, the District Court granted the Comptroller's motion for summary judgment. The Court of Appeals for the Fourth Circuit vacated the District Court's judgment on the ground that the Court of Appeals could not determine either what particular factors had been considered by the Comptroller or whether he had acted within permissible bounds of discretion in denying the application, and the Court of Appeals remanded the case for a trial de novo before the District Court. Rule: The appropriate standard for review is whether the Comptroller of the Currency's adjudication was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, as specified in 5 U.S.C.S. § 706(2)(A). In applying that standard, the focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court.

What were the facts and rule from Brown v. Avemco Investment Corp.

Facts: Robert Herriford received a loan from AVEMCO Investment Corp. (Defendant). Herriford gave Defendant an interest in an airplane as security for the loan. Further, the security agreement contained a provisions stating that if Herriford leased, sold, transferred, mortgaged, or encumbered the interest in the airplane secured under the agreement, Defendant would be entitled to the full amount of the loan immediately. Later, Herriford, Brown (Plaintiff), and two other plaintiffs entered into an option and lease agreement. Pursuant to the agreement, Plaintiff was to pay Herriford an hourly rental fee to use the plane and for additional payments that would be used to reduce Herriford's debt to Defendant. Likewise, the agreement between Plaintiff and Herriford contained a provision that stated Brown and the other plaintiff would have the opportunity to pay the remaining balance, purchasing the plane. A couple days later, Plaintiff and the other plaintiffs paid the remaining balance on Herriford's mortgage debt to Defendant. Plaintiff informed Defendant that he and the other plaintiffs were asserting their option to purchase the plane, nevertheless, Defendant refused to accept payment. Thereafter, Defendant accelerated payment due on the Herriford's loan. Defendant asserted that the moment Herriford leased the plane to Plaintiff, Defendant was entitled to the entire amount of Herriford's loan plus interest and an insurance fees, a total of $5,078.97. Subsequently, Plaintiff and the other plaintiffs told Defendant that they did not accept Defendant's refusal to accept their offer. Furthermore, Defendant repossessed the plane from Herriford and sold the plane to separate party for $7,000. Plaintiff and the other plaintiffs brought claiming Defendant is liable for conversion. The trial court refused to instruct the jury that Defendant's acceleration would only be successful if Defendant reasonably believed in in good faith that Defendant's security interest in the plane was impaired. The jury ruled in favor of Defendant, and Plaintiff and the other two plaintiffs appealed. Rule: Defendant did not have a reasonable, good faith belief that its security interest in the plane was impaired. In this case, the trial court improperly refused to instruct the jury on the proper use of acceleration. A creditor may accelerate a loan only if the creditor has a good faith believe that the debtor's payment or performance under the security agreement will be impaired. Further, a creditor may not use an acceleration clause to obtain an advantage against the debtor.. Here, Defendant could have accelerated Herriford's payments because Defendant wanted to sell the plane at a higher price to another party, thus, gaining a commercial advantage. Plaintiff and the other plaintiffs offered to pay Herriford's debt to Defendant in full, eliminating the risk of nonpayment. Instead, the evidence suggests that Defendant may have been acting in bad faith. Therefore, the trial court improperly refused to instruct the jury on the proper use of acceleration. Thus, there was no prospect of nonpayment that would justify.

What are the facts and rule from Cuomo v. Clearinghouse?

Facts: The New York Attorney General] sent letters to several national banks making a request "in lieu of subpoena" that they provide certain non-public information about their lending practices. He sought this information to determine whether the banks had violated the State's fair-lending laws....Respondents, the federal Office of the Comptroller of the Currency ("Comptroller" or "OCC") and the Clearing House Association, a banking trade group, brought suit to enjoin the information request, claiming that the Comptroller's regulation promulgated under the National Bank Act prohibits that form of state law enforcement against national banks....The question presented is whether the Comptroller's regulation purporting to pre-empt state law enforcement can be upheld as a reasonable interpretation of the National Bank Act. Rule: Under the familiar Chevron framework, we defer to an agency's reasonableinterpretation of a statute it is charged with administering. Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). There is necessarily some ambiguity as to the meaning of the statutory term "visitorial powers," especially since we are working in an era when the prerogative writs—through which visitorial powers were traditionally enforced—are not in vogue. The Comptroller can give authoritative meaning to the statute within the bounds of that uncertainty. But the presence of some uncertainty[SRC1] does not expand Chevron deference to cover virtually any interpretation of the NationalBank Act [SRC1]If the statute is ambiguous, then the court considers whether the regulator or agency's interpretation of the statute is a reasonable interpterion If the statute is ambiguous, then the court considers whether the regulator or agency's interpretation of the statute is a reasonable interpterion

What are the facts and rule from NationsBank of North Carolina v. Variable Annuity Life Insurance Co.?

Facts:Petitioner Nationsbank of N.C. sought permission from the Comptroller of the Currency to sell annuities. The Comptroller granted Nationsbank of N.C.'s petition as he determined that federal law permits annuity sales as a service to bank customers, as the Comptroller considered these sales "incidental" to "the business of banking" under the National Bank Act, Rev. Stat. § 5136, as amended, 12 U.S.C. § 24 Seventh. These annuities are not "insurance" within the meaning of § 92; that provision, by expressly authorizing banks in towns of no more than 5,000 people to sell insurance, arguably implies that banks in larger towns may not sell insurance. Respondent Variable Annuity Life Insurance Co. (VALIC), which sells annuities, challenged the Comptroller's decision and filed suit in the United States District Court for the Southern District of Texas to seek declaratory and injunctive relief. The United States District Court for the Southern District of Texas upheld the Comptroller's conclusions as a permissible reading of the National Bank Act, but the United States Court of Appeals for the Fifth Circuit reversed the decision. Rule: The business of banking is not limited to the enumerated powers in the National Bank Act, Rev. Stat. § 5136, as amended, 12 U.S.C.S. § 24 Seventh; the Comptroller of Currency therefore has discretion to authorize activities beyond those specifically enumerated. The exercise of the Comptroller's discretion, however, must be kept within reasonable bounds.

What are the facts and rule from Arnold Tours Inc. v. Camp?

Facts:The South Shore National Bank (South Shore), a national banking association chartered by the United States Government, has been engaged in the travel agency business, operating it as a department of the bank since November 1966. Plaintiffs, Arnold Tours, Inc., and 41 other independent travel agents of Massachusetts engaged in the travel agency business, filed a class action seeking for declaratory relief and injunctive relief to force South Shore out of the travel business. The district court granted summary judgment for plaintiffs, holding that it is illegal for a national bank to operate a full-scale travel agency. In addition, the district court permanently enjoined South Shore from engaging in the travel agency business and ordered the bank to divest itself of its travel department within six months. The bank challenged the district court's decision. Rule: A national bank's activity is authorized as an incidental power, necessary to carry on the business of banking, within the meaning of the National Bank Act, 12 U.S.C.S. § 24, Seventh, if it is convenient or useful in connection with the performance of one of the bank's established activities pursuant to its express powers under the National Bank Act. If this connection between an incidental activity and an express power does not exist, the activity is not authorized as an incidental power.

True or false: Borrowers involved with a mortgage dispute with a bank may allege a violation of the ATR (ability to repay) rule of section 1412 within 4 years of the date of violation and seek remedies including money damages.

False, they must allege a violation of ATR rule within 3 years after the date of the violation.

True or false: Under graham leach bliley, financial holding co. could not own both a bank and securities underwriter

False.

True or false: the investment test is looked at the most heavily for the CRA.

False. It's the lending test.

True or false: The CRA cannot prevent banks from merging if they don't engage in community reinvestment.

False. They can.

True or false: A long term solution to the subprime mortgage defaults during the subprime mortgage crisis was letting borrowers who could not repay their loans refinance and pay the loan out of the proceeds of the new, larger loan. If the borrower did default, the bank could simply foreclose on a valuable asset and get its loan repaid from the foreclosure sale.

False. This strategy did work-after a fashion- as long as home values were rising. But when they began to fall, the flaws in the system became all too evident, as many subprime borrowers were unable to come up with the mortgage proceeds. The situation was exacerbated by the fact that such borrowers had often taken out adjustable rate mortgages with low "teaser" rates, which reset to higher rates at exactly the time when borrowers were lease able to meet the new, higher payment schedules.

True or false: For the OTS to bring a notice of charges regarding questionable loans, mere negligence is enough.

False. have to show scienter and not mere negligence. Willful disregard-showing of intent Recklessness-aware of the potentially adverse consequences of a particular action but without intent to cause harm. Knowing that harm could be caused by their actions is required in this case.

Why did Senior tranches of MBS receive AAA ratings?

Fannie Mae and Freddie Mac guaranteed their MBS Guarantee was a form of credit enhancement. Reduced the risk of the MBS

What was Regulation Q under the Banking Crisis?

Federal reserve regulated interest on savings accounts. Larger banks were not happy to pay federal deposit insurance. Larger banks that were very stable to pay out if smaller banks fail., so large banks wouldn't have to pay interest on demand deposit accounts. Over the years banks only cared about getting around how to avoid paying on deposit accounts

What are Direct credit substitutes

Financial standby letters of credit Bank guarantees repayment of a financial obligation Substitutes for making a loan. If bank issues $50k financial standby letter of credit, on-balance sheet credit equivalents amount would be: Ex: $50kx100%=50k

Subprime borrowers would not qualify for most favorable interest rates and fees because these individuals do not have what?

Good credit history or Stable employment.

What was the credit conversion factor?

Guaranteeing payment of a general obligation bond. Financial standby letter of credit or performance standby letter of credit? Financial standby letter of credit-> direct credit substitute with a 100% credit conversion factor.

The state law prohibits any entity from selling insurance in this state unless every officer, director, or employee of that entity is a state licensed insurance agent. Can a national bank sell insurance in that state without complying with the state law?

Have to have every employee officer and director become a licensed insurance agent? It's too expansive, yet the bank could physically comply with that. It wouldn't prevent them from operating, but it would be very burdensome to not only have every officer or employee become a licensed insurance agent, but also directors who are not even meeting with customers. To have all those people have to be licensed just so a handful of employees could sell insurance would be very burdensome, interfere with the policy of the National Bank to sell insurance in the small towns they're permitted to sell insurance.

Subprime mortgages defaulted because of re-pricing to higher rates. Why?

Housing bubble burst-> sharp decline in real estate values-> more defaults Fannie mae and freddie mac and lehman brothers lost money on subordinate tranches of the CMOs that were retained Investors in the highest tranches of the CMOS also began losing their investments, including commercial real banks. Was running through all of the tiers; first Senior tranche, then mezzanine tranche and then subordinate tranche.

If a regulator issues an order i.Removing or suspending an IAP from office in an insured depository institution OR ii.Prohibiting an IAP from participating in the affairs of an insured depository institution, then what happens? What is the exception?

IAP cannot hold office or participate in conducting adairs Of any insured depository institution or any federal regulator Of depository institutions as long as order is in effect If the order is in effect indefinitely then IAP will be barred from banking life. Exception requires the written consent of the regulator that issues the order and written consent of regulator for the institution where IAP wishes to work or participate.

How did the Graham Leach Bliley Act restrict savings and loan holding companies?

If S&L holding company acquired thrift after May 4, 1999, then activities restricted to only those permitted for financial holding companies. Exceptions: Unitary Savings and loan holding company existing before May 4, 1999 was grandfathered. The act also grandfathered unitary Savings and loan holding company Any business activity could be invested-financial or nonfinancial.

Why may state banks refuse to become members of the Federal Reserve System?

If they were members, state banks would have to comply with Federal Reserve requirements. Most state banks did not become members of the federal reserve system, joining the federal reserve caused them to become subject to the federal regulations Remained very susceptible to runs on the bank. An additional regulations includes higher reserve requirements

What prompted govt officials to begin investigating Former New York Governor Eliot Spitzer?

In July 2007, North Fork Bank filed a SAR concerning financial transactions made by Governor Spitzer. b.In Fall 2007, a separate SAR was filed by HSBC about transactions involving two shell companies: QAT International and QAT Consulting Group c.Mr. Spitzer's SAR shhowed he had made several wire transfers to those two companies. d.Federal agents began an investigation into the business of thse shell companies as well as Mr. Spitzer's dealings with these companies e.Investigation ultimately resulted in resignation of Mr. Spitzer. f.SAR filed by North Bank indicated Mr. Spitszer made three wire tranders totaling about 10,000 to the QAT companies. g.Bank official filed the SAR because they believed the separate wire transfers were an attempt to abodi Bank Secrecy Act requirement that banks file a currency transaction reqportffor transacatinos more than 10k

What is recapitalization?

In corporate finance, a leveraged recapitalization is a change of the capital structure of a company, a substitution of equity for debt —e.g. by issuing bonds to raise money, and using that money to buy the company's stock or to pay dividends. Such a maneuver is called a leveraged buyout when initiated by an outside party, or a leveraged recapitalization when initiated by the company itself for internal reasons. These types of recapitalization can be minor adjustments to the capital structure of the company, or can be large changes involving a change in the power structure as well.

So state banks could branch right. So did national banks also want to be able to do this?

In order to remain competitive, national banks wanted a similar ability to branch, so in 1927 congress passed the McFadden Act of 1927 which gave natuibak branches the ability to branch in their home office cities to the same extent that state law allowed state banks to branch in their home office cities. National banks could also get access to economies of scale, holding company securities could be issued on the stock market, and centralized management in which a bank holding company gave advice to a bank.

What happened in US v. Chevy Chase Bank Consent Decree involving red lining?

In the consent decree, the Justice Department extended the theory of the equal credit opportunity act to go after a depository institution (Chevy Chase Bank) for alleged red lining but the claim was that the bank was refusing to make loans in predominantly poort, minority areas in Washington DC metropolitan area based on the bank not marketing the products and services in these neighborhoods. As part of the settlement, Chevy Chase agreed to open branches in areas of Washington, D.C., and Prince George's County, Maryland

What did the FDIC's Bank Insurance Corporation Improvement Act of 1991 (FDICIA) do?

Increased FDIC's ability to borrow from Treasury. Established risk-based assessment system for the premiums paid to deposit insurance. The riskier the financial system, the higher the premium. Addressed "too big to fail." Federal deposit insurance-> 100k per insured account at this time.

What does it mean that a Federal Reserve Bank is a lender of last resort?

Instituted to provide emergency loans to member banks trough a discount window. Could borrows loans at a discounted price for a set period of time. Could go to the federal reserve bank in their district, those loans do require collateral. Securities provided must be govt securities or commercial paper. High quality company not expected to fail. Or govt securities would be the collateral. Borrow at a discount rate at FULL PAR VALUE (aka Federal reserve would clear these checks at 100% of the value)

What is the services definition of a bank?

Institution that accepts demand deposits and makes commercial loans. Can be withdrawn on demand. Accepts demand deposits and makes commercial loans.

What is leverage?

Interest rate is the premium or the price that you pay to the bank or the creditor to lend you the money. Debt typically has a maturity date. Equity financing (selling stock) Debt financing (borrowing money) Financing leverage Measuring of debt financing relative to equity financing Debt to equity ratio=total debt/total equity.

What is a Collateralized debt obligation (CDO) or a collateralized mortgage obligation (CMO)?

Investment banks created CMOS by pooling mortgages together Investment banks sliced up CMO into maybe 10 different tranches with varying levels of risk and return and issued securities representing the different tranches.

When subprime borrowers stopped paying on the mortgage loans what happened?

Investors lost interest in CMOs backed by subprime mortgages and stopped purchasing these securities. Since lenders could no longer sell subprime mortgages in the secondary market, lenders stopped making subprime loans Subprime mortgage market collapsed and many of the AAA rated MBS helf by banks and other investors became worthless.

To remove an IAP the IAP's misconduct shows culpability because it:

Involved personal dishonesty or Showed willful or continuing disregard for the bank's safety and soundness.

What did the 1934 National Housing Act do?

It created two federal agencies, the Federal Housing Administration (FHA) and the Federal Savings and Loan Insurance Corporation (FSLIC). The FSLIC insured insured savings and loans account holders' deposits and operated from 1934-1989. The FHA insured mortgage lenders and banks against the threat of borrower default on their loans, in return for a fee. The FHA became part of the U.S. Department of Housing and Urban Development (HUD) in 1965.

What was the Transaction Account Guarantee program under the Banking Act of 1933? Why did the FDIC do this?

It guaranteed non-interest bearing accounts in full. Ex: A million dollars? Guaranteed in full. Small business accounts would generally have a checking account that might have 500k in it Many corporations didn't feel comfortable in 2008 keeping their money in the banks above the 250k limit. They were draining money out of the banks and putting them in other short term investments.

When Prof. Bailey was in college, Citibank decided they were gonna make credit cards available for the very first time to college students, asked the students what their major was cuz nobody had an income. Music major was turned down, is this illega under the ECOAl?

It is against the law because the ECOA is based on the disproportionate discriminatory effect. A lot more men are bio majors and chem majors and math majors, and a lot more women are music majors.

he State of Remoria prohibits a creditor from imposing on a debtor any late-payment penalty exceeding $1 per day. Assume that federal law refers neither to late-payment penalties nor to whether the state limits on such penalties apply to national banks. Does Remoria's $1 per day limit bind a national bank to Remoria?

It is definitely preempted. Under the National Bank Act, Congress has given National Banks very broad powers to make loans. Also the power to assess interest and to charge late fees. By limiting the Bank to this $1 per day late fee charge, will limit the policy of the National Bank Act to let this bank make loans. So this law would be preempted.

let's say a creditor requires applicants for a 150 million dollar mortgage loan. They say that you have to have an income level of 750,000 or more to qualify. Does this income level violate the ECOA?

It seems like it could discriminate. HOWEVER, the bank can demonstrate the need for a 750,000 income level in this case and a requirement to repay the 150 million mortgage loan. Would not be a violation of the ECOA to have a minimum income level.

How did section 1411 of the Dodd Frank Act address the problem of many subprime borrowers being unable to come up with their mortgage proceeds due largely to ARMs?

It stated that "no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan was consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments."

If the state permits banks from taking deposits in the state without having a charter issued by the state branching commissioner, can the national banks take deposits at those branches? National Bank has a charter already from the OCC, do they need a second charter from a State Banking Commissioner in order to take deposits in this state?

It would be preempted because national banks grants states power to accept deposits and make loans and doesn't say anything about complying with any state licensing law. Would condition deposits on licensing. Definitely a conflict here. The OCC is the only one that gives them approval to operate

Why did the prices of real estate plummet during the Savings and Loan Crisis (1980-1989)

Large amount of commercial real estate put on the market. What happens when supply increases significantly? The price goes down, so the price of real estate plummeted. Many banks thus became insolvent and failed.

From 1863-1864, what powers did the holder of a bank note have?

Legal right to redeem note on demand in specie at face value Must present issuing bank to redeem Traded at discounts from face value. Despite travleling all the way to Michigan, could stop paying out gold and specie. Bank might have just failed Could not use the mail service. Discount based on the location of the face value. Farther west were discounted even more.

What is the Function of federal reserve banks?

Lender of last resort Administer discount window Set discount rate Examining state member naks Supervising bank golding companies and any nonbank subsidiaries. Operating elements of the payment system Clearing checks Maintaining the fed wire Federal Reserve System funds itself through interest earned on govt securities it holds.

Traditional mortgage loan remained on the lender's books as an asset. Why?

Lender received the loan payments Lender monitored loan to ensure that payments were made on a timely basis.

After the mortgage loans were sold after the subprime mortgage crisis, what happened to the credit risk of these mortgages that were sold?

Lenders also benefited because credit risk of the loan was transferred to another entity

What were piggyback mortgages under the subprime mortgage crisis?

Lenders based credit approval decisions on whether borrowers could afford the payments with the initial low rate Once the rate reset to the higher interest rate, borrowers could no longer afford their payments. Borrowers who could not afford the down payment were Permitted to take out a second loan for the down payment 100% loan to value

Lenders benefited from this process of selling mortgage loans (after the subprime mortgage crisis) because in return for the mortgages that were sold, what did lenders receive?

Lenders received money->capital that can be used for more loans Lenders also received upfront fees for making mortgage loans

For syndications each participating bank shares proportionately in:

Lending the money Receiving loan payments Credit risk Each bank absorbs its proportionate share of any losses as a result of a default. Syndications of a very large loans dried up. "Hung loans" Risk of equity insolvency

What are debt securities?

Liabilities of issuer Includes bonds, notes, commercial paper, and debentures.

What does it mean for a loan to mature?

Loan maturity date refers to the date on which a borrower's final loan payment is due. Once that payment is made and all repayment terms have been met, the promissory note that is a record of the original debt is retired. In the case of a secured loan, the lender no longer has a claim to any of the borrower's assets.

What is a securities underwriter?

Makes a distribution of securities in one of the two ways. i.Sells securities on behalf of an issuer in connection with a distribution to public investors. ii.Buys securities from the issuer with a view to distributing the securities to public investors

After the subprime mortgage crisis, .Since lenders no longer had the risk associated with the mortgage loans, what happened to their underwriting standards?

Many lenders relaxed their underwriting standards Lenders no longer had the need to monitor the loans.

How does section 1403 of the Dodd Frank Act respond to abuses by mortgage originators as implemented by CFPB regulation?

Mortgage originator training was improved, they must be licensed or registered as required under state or federal law, or, if license and registration is not required, their employers must ensure that they meet characters and fitness standards and pass a criminal background check.

Example of a High loan to value ratio: -75% loan to value ratio (LTV ratio) Appraised value of $1,000,000. Loan amount was $750,000. What is the equity amount?

Multiply by .75 Equity amount would be $250,000.

What is the premises for national banks?

National bank may acquire and hold real property "as shall be necessary for its accommodation in the transaction of its business." Permits banks to own their premises and related properties, either directly or through a subsidiary bank premises corporation Premises are the locations in which the bank conducts its business such as the branches and corporate offices. Related properties include operations centers, training facilities, etc. Generally prohibited from making investments in bank premises or in corporations that own bank premises if investment is greater than bank's capital stock, unless bank obtains approval from OOC. The purchase of real estate under the premises exception must be reasonably necessary to carry on the business of banking.

What is the real estate exception for national banks?

National banks may hold real estate received in satisfaction of debts or purchased at foreclosure sales. Permite banks to realize the value of real property that served as collateral for a loan that defaulted. Permit banks to take property that did not serve as collateral on loan in order to reduce the loas on the loan. Banks generally can hold the real property for a maximum of 5 years, unless regulator extends time for up to another 5 years, Real property acquired in satisfaction of debts or in foreclosure is called "OREO" (other real estate owned)

If the required reserve ratio 10% and there is a 5000 deposit made, how much must there be in reserves and how much can be loaned out?

Need 500 in reserves Can loan 4500

What does the Visitation 12 USC Section 484 say about National Bank visitorial powers?

No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice. Under Dodd-Frank, federal banking does not limit or restrict the authority of the state attorney general to bring an action against a national bank in court to enforce an applicable law. Same visitorial powers provisions apply to Federal savings banks and their subsidiaries.

How effective are these capital standards in determining the health of a bank? If a bank meets all the standards, does that automatically mean that the bank is a strong bank?

No, within each of the risk-weight categories, the assets could have extremely different levels of credit risk.

Do thrift institutions meet the legal definition of a bank?

No. -1. A thrift foes not have a federal or state charter to operate as a thrift. -Meet both prongs of bank holding company act: Generally insured by the FDIC Now accepts demand deposits and makes commercial loans. Bank holding company act exempts thrifts Savings and loan holding company act regulated thrifts Thrift is not legally a bank. -2.Meets services def of a bank Makes demand deposits Makes commercial loans 3.Meets economic function def of a bank Financial intermediary Provides transaction services through demand account.s

Does a guarantee if they aren't part of the CRA nullify the loan?

No. As long as they're in a low income area. Matters where the business is located.

What was a loophole that Bank Holding Companies would take advantage of to get around the new regulations?

One bank could create a second holding company to sell one of the subsidiary banks to the new holding company. Each of these holding companies becomes a subsidiary

What does a bank's assessment area consist of for the purposes of the CRA?

One or more metropolitan statistical areas or one or more contiguous political subdivisions such as counties, cities and towns. It must also include the areas in which a bank has its main office, its branches, and its deposit-taking ATMs, as well as surrounding areas in which the bank has originated or purchased a substantial portion of its loans

What did the Bank holding company amendments in 1970 do?

One-bank holding companies regulated by federal reserve Nonbank activities must be closely related to banking: 1. Making loans. 2. Writing full-payment leases. 3. Insuring the repayment of credit. Credit life insurance would pay off the rest of the loan. 4. Recording and transfer of financial information 5. Providing financial advice

Prof. Bailey was an agent for the creditor and calling someone to pay the debt. Waking you up from a phone call. Did she break the law?

Only directed toward and agent of the creditor so she did not break the law as she was not a third party.

What does the comptroller consider?

Organizers are familiar with national banking laws and regulations Proposed management s competent and experienced Sufficient amount of capital

What are the facts and rule from Federal Deposit Insurance Corporation v. Philadelphia Gear?

Orion Manufacturing Corporation (Orion) was a customer of Philadelphia Gear Corporation (PG). To provide a guarantee of payment to PG, Orion obtained a letter of credit for the benefit of PG from Penn Square Bank, N.A. (Bank). If Orion failed to pay an invoice to PG for at least 15 days, PG could draw upon that line of credit, up to $145,200. This type of credit line, meant to guarantee payment to a seller, is referred to as a standby letter of credit. To back up that line of credit, Orion executed an unsecured promissory note in favor of the Bank. This note is referred to as a backup letter of credit. Nothing was due on the backup letter of credit unless PG presented drafts on the standby letter of credit. Thus the backup letter was a contingent promissory note. The Bank did not credit any account of Orion's in exchange for the note, and did not treat its own assets as increased by its acceptance of the note. In 1982, the Bank was declared insolvent and the Federal Deposit Insurance Corporation (FDIC) was appointed its receiver. PG presented drafts on the standby letter of credit for goods delivered before the Bank's insolvency, but the FDIC returned them unpaid. PG sued the FDIC, claiming that the standby letter of credit was an insured deposit under the definition of "deposit" set forth at 12 U.S.C. Section 1813(l)(1), and that PG was therefore entitled to $100,000 in deposit insurance. Rule: i) (1) the unpaid balance of money or its equivalent received or held by a bank in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial...account, or which is evidenced by...a letter of credit or a traveler's check on which the bank is primarily liable: Provided, That, without limiting the generality of the term "money or its equivalent," any such account or instrument must be regarded as evidencing the receipt of the equivalent of money when credited or issued in exchange for checks or drafts or for a promissory note upon which the person obtaining any such credit or instrument is primarily or secondarily liable.... Since the creation of the FDIC, Congress has expressed no dissatisfaction with the FDIC's interpretation of"deposit"; indeed, Congress in 1960 adopted the FDIC's regulatory definition as thestatutory language. When we weigh all these factors together, we are constrained to conclude that the term "deposit" does not include a standby letter of credit backed by a contingent promissory note.... With a standard "commercial" letter of credit, Orion would typically have unconditionally entrusted Penn Square with funds before Penn Square would have written the letter of credit, and thus Orion would have lost something if Penn Square became unable to honor its obligations. [D]eposit insurance extends to such[SRC1] a letter of credit backed by an uncontingent promissory note [SRC1]Despite the plain language, bottom line, if there is money in the bank/an account, then it will be covered, but if there is nothing in the bank, there will be nothing to cover. In light of the longstanding interpretation of the FDIC, such a letter does not create a deposit. This interpretation is consistent with Congress' intent in creating the FDIC, namely ensuring that a deposit of "hard earnings" entrusted to a bank would not lead to a tangible loss in the event of a bank failure. In this case, the standby letter of credit backed by a contingent promissory note did not entrust any non contingent assets to the Bank. Therefore, such a letter of credit does not give rise to an insured deposit.

What are the CRA ratings for banks?

Outstanding Satisfactory Needs to improve Substantial non compliance.

What are equity securities?

Ownership interests in issuer. Includes common stock and preferred stock.

What does par value mean?

Par value is the value of a single common share as set by a corporation's charter. It is not typically related to the actual value of the shares. In fact it is often lower. Any stock certificate issued for shares purchased shows the par value. When authorizing shares, a company can choose to assign a par value or not.

What are the three qualities of demand debt?

Payable on demand->permits liquidity to be transferred quickly and easily Payable to third parties-> effective method of transferring liquidity Payment mechanism-> checks are the most efficient means of transferring liquidity.

How should the Gramm leach bliley act be blamed for the subprime mortgage crisis?

Permitted the affiliation of commercial bank and investment banks through financial holding companies. Affiliated contributed to systemic risk because banks could sell subprime mortgages to affiliate investment banks that issued the MBS All the fees would be earned by the commercial bank and its affiliate investment bank rather than by a third party investment bank. Banks began making more subprime loans and sold loans to their affiliated investment bank which in turn issues MBS and earned mored fees. Affiliation of commercial banks and investment banks fueled the subprime mortgage boom.

What is reverse redlining?

Predatory lender focuses its lending practices on low income or minority communities.

What does the fair housing act of 1968 prohibit?

Prohibits discrimination against applicants in sale and rental of housing and extension of mortgage loans on the basis of: i.Race ii.Color iii.Religion iv.National origin v.Gender vi.Handicap or disability vii.Family status including children under the age of 18 living with parents and pregnant women

What does the Equal Credit Opportunity Act do?

Prohibits discrimination against credit applicants based on a number of factors including: Age, gender, marital status, race, color, religion, national origin, or receipt of public assistance.

What is prompt corrective action?

Prompt corrective action is a set of capital-based requirements and restrictions for FDIC insured depository institutions.

Specifically qualified banks also created subsidiaries that engaged in:

Proprietary trading Owning or sponsoring a hedge fund.

What are the public policy objectives for lending limits?

Protect the safety and soundness of bank by: i.Preventing banks from making excessive loans to one entity, or to related entities that are financially dependent. ii.Encouraging diversification of loans. b.Provide equitable access to credit.

What did investment banks do that was bad during the subprime mortgage loan crisis of 2007?

Purchase subprime and prime mortgages Securitization Pool mortgages to create securities backed by mortgage loans. Sell mortgage backe securities to investors.

What is the difference between qualified and non-qualified investments?

Qualified investments: Qualified investments are accounts that are most commonly known as retirement accounts and they receive certain tax advantages when the money is deposited into the account. Non-qualified investments: Non-qualified investments are accounts that do not receive preferential tax treatment. You can invest as much or as little as you want in any given year, and you can withdraw at any time. Money that you invest into a non-qualified account is money that you've already received through income sources and paid income tax on it.

What is the qualified mortgage presumption?

Qualified mortgage is any residential mortgage in which a.Loan is fully amortizing ie.Every month money has to pay money down Can't be negative amortization which is increasing the amount of the loan because its not getting paid adequately every month (lenders have to do some work) i.Payments may not result in the principal balance increasing ii.Consumer may not defer payment of principal iii.No balloon payments. b.Income of borrower is documented and verified. (make sure employer is still employed there) c.For adjustable rate loans, underwriting must be based on maximum rate permitted during the first 5 years d.Total points and fees may not exceed 3% of the loan amount and up to an additional 2 discount points if the discount points reduce the interest rate on the loan.

Why are banks limited in their ownership of real estate?

Real estate may have highly volatile values-> significant investment risks. Real estate is illiquid-> it cannot be sold quickly and easily to meet depositor demands to withdraw funds. Real estate may require substantial management and oversight. Possible conflicts of interest between the banks and customers involved in real estate development. Ultimately, they want banks to make loans rather than invest in real estate.

Goal is to grant charters to proposed banking institutions that:

Reasonable chance of success profitable and Will be operated in a safe and sound manner

What are Assets sold with recourse?

Recourse is the retention of any risk of credit loss. If a bank sells $100k in loans with full recourse, on-balance sheey credit equivalent amount is Ex: 100k x 100%=$100k. The recourse provides a credit. enhancement if the loans are listed on the books at 100k. Bank sells them with recourse and receives 110k. Bank may be able to recognize income of 10k.

What does the Truth in Lending Act (1968) require?

Requires lenders to provide sufficient information about a credit contract, in easily understood terms, so the consumer can make an intelligent decision about purchasing credit. Lenders are required to inform the customer i.in a standard form disclosure. Ii Total cost of loan and Iii.Any other terms that might impact a consumer's financial well being including: Prepayment penalties, Rate adjustments

How does the banking system create money? Give an example to explain.

Reserve requirement=10% Federal reserve purchases 5k of securities. Seller deposits the 5k in an account at bank A. Bank A has 5k of legal reserves Bank A sets aside 5k x 10%= $500 required reserves Bank A has $4,500 of excess reserves Federal reserve's purchas of securities created 5k in new money.

When real estate values began declining what happened?

Residential mortgage loans and acquisition and development loans held on bank's books also began defaulting. Caused the banks to lose even more money.

Fannie Mae, Freddie Mac and investment banks would keep a retained interest in MBS that were sold on the secondary market. Why?

Retained interest was the most subordinate tranche. Retained interests are a form of recourse. Recourse is the retention of any risk of credit loss. Allowing recourse against them for any credit loss. This subordination was another form of credit enhancement. This credit enhancement gave MBS a AAA rating for the investment banks

Who are the ten voting members of the Financial stability overnight council?

Secretary of treasury Chairman of fed reserve Comptroller of currency Director of bureau of consumer financial protection Chariman of securities and exchange commissions Chairman of the federal deposit insurance corporation Chairman of the commodity futures trading commission Director of the federal housing finance agency Chairman of the national credit union administration.

Which loans did banks keep on their books in the housing crisis?

Single family mortgages Acquisition and development loans.

Is this a solvent or insolvent thrift: -Assets: (reserves 40+loans 60=total assets 100) Liabilities and capital: liabilities 75+ common stock 10 + retained earnings 15=100. Capital also 25 so total liabilities and capital is 100. Net profit -Retained earnings15+ net earnings40+ cumulative retained earnings 55

Solvent thrift

What is the Dodd Frank Act's preemption standard?

State consumer financial law preempted only if: a.Law would have a discriminatory effect on national banks as compared to the effect on state-chartered banks. b.Law prevents or significantly interferes with a national bank's exercise of its power in accordance with the "legal standard for preemption" in the Barnett Bank decision OR c.Law is preempted by another Federal law.

What is express statutory non-preemption

State explicitly states that it does not preempt state law. Bank has to comply with federal and state law Effectively, banks have to comply with the stricter of the two.

What were bank holidays (banking crisis of 1929-1933)

State govts declared a bank holiday. (orderly withdrawals of their deposits and orderly returns rather than people rushing to the bank) Suspend repayments to depositors. Stopped redeeming bank notes Bank holidays in one state would get nervous about the next state because it would make them nervous about feeding their families. Would try to withdraw before those banks closed.

What is express statutory preemption?

Statute explicitly states that it preempts state law. State statute is preempted Bank has to comply with the federal law

What is an example of a securities underwriting issue that that the Banking Act of 1933 wanted to prohibit?

Suppose I'm a lending officer and engage in underwriting. The company I work for is not a very strong company financially, and I loan money to a sister company. Somebody is more interested in buying the shares of my company and the new loan is not gonna pay be paid back. Consumers are thus going to lose public confidence if they see two companies working together in this manner- Congress thus wanted to separate them.

A US financial institution that holds a private banking account for a non US person must:

Take reasonable steps to determine: Nominal and beneficial owners of account Source of funds deposited into account. Report suspicious activity Take reasonable steps to: Conduct enhanced scrutiny to detect and report transactions involving foreign corruption using a private bank account of a senior foreign political figure known as a "politically exposed person"

What is the third step of calculating risk-based capital ratios?

Take the credit-equivalent amounts and place them in the appropriate risk weight categories. i.Suppose credit equivalent amount of standby letter of credit is 50k Standby letter of credit was guaranteeing General obligation bond issued by a municipality. Which risk weight category should the 50k be placed in? 20% risk weight category.

What is the fourth step of calculating risk-based capital ratios?

Take total amount of each risk weight category and multiply it by risk weight percentage for that category

-If the interest rate in a state for lenders in general is 10% and the interest rate for state chartered banks is 8% then what interest rate could a federally insured state chartered bank charge?

The 10% for lenders in general. They could charge the highest rate for lenders in that state which is 10%. The policy objective here is that Congress, after FDIC insurance went into place, which is many years after the Tiffany Bank case, that Congress is trying to protect all federally insured institutions not just national banks, federal institutions like state chartered banks that are federally insured, that cover all state chartered banks.

What is the purpose of the Financial stability overnight council?

The Council is charged with identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States' financial system. The Council consists of 10 voting members and 5 nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an independent insurance expert appointed by the President.

What is the FDICIA?

The FDIC Improvement Act (FDICIA) was passed in 1991 at the height of the savings and loan (S&L) crisis. The act fortified the role and resources of the Federal Deposit Insurance Corporation (FDIC) in protecting consumers. The most notable provisions of the act raised the FDIC's U.S. Treasury line of credit from $5 million to $30 million, revamped the FDIC auditing and evaluation standards of member banks, and included the Truth in Savings Act, also known as Regulation DD

What is the FDIC? What is the standard insurance?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

How are credit unions and banks rated by the the NCUA (National Credit Union Administration)?

The NCUA adopted its current rating system, known as CAMEL, in 1987. The current CAMEL rating is based upon an evaluation of five critical elements of a credit union's operations: Capital adequacy, asset quality, management, earnings, and liquidity and sensitivity to market risk.

What does the Comptroller of the Currency do?

The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury and is led by the Comptroller of the Currency. Under Chevron, the Comptroller of the Currency is charged with the enforcement of banking laws So normally we would defer to comptroller of the currency if there is an ambiguous term in a statute.

What is the Truth in Savings Act (Regulation DD)?

The Truth in Savings Act, which is part of the FDICIA, forced banks to begin disclosing savings account interest rates, using the uniform annual percentage yield (APY) method (the real rate of return earned on an investment, taking into account the effect of compounding interest) This has helped consumers to better understand their potential return on a deposit at a bank, as well as to compare multiple products and multiple banks simultaneously.

Why does a bank want to issues letters of credit?

The bank will earn fees. A bank that issues a large amount of standby letters of credit will receive fee income that will increase the bank's earnings. x.The fee income is cash that will increase the bank's assets. However, liabilities will not increase because this contingent liability is an off-balance sheet item.

Can the comptroller not do anything, and if never challenged can just use a vague determination?

The court does not require contemporaneous explanation. When there is, comptroller has put together contemporaneous findings of facts, the validity of the comptroller's actions must stand or fall on the propriety of that finding. It will discourage the comptroller from providing info after the fact. Comptroller is better off not being specific.

Any preemption determination must be made by a court or by regulation or order of the Comptroller on a case-by-case basis. How is the case-by-case determination usually handled?

The determination by the Comptroller regarding the impact of a particular state law on any national bank subject to that law or the law of any other state with "substantially equivalent terms." Comptroller must consult with Bureau of Consumer Financial protection in determining another state's law is "substantially equivalent" the state law. Comptroller can say these 20 or 30 states have substantially the same law, and make a preemption determination for all of them, have to consult with the Bureau of Financial protection that that's ok.

What is the eighth step of calculating risk-based capital ratios?

The eight step-is divide total capital by risk weighted assets Total risk based capital ratio=total capital/risk-weighted assets greater than or equal to 8% b.Tier 1 risk based capital ratio=tier 1 capital/risk weighted assets greater than or equal to 6% c.New common equity tier 1 risk based capital ratio= Common equity/risk-weighted assets greater than or equal to 4,5%.

National banks are permitted to acquire stock in companied that are designated by the Small Business Administration as small business investment companies (SBICs). What percent cannot be exceeded?

The investment cannot exceed 5% of the bank's capital.

What is the investment test under the CRA?

The investment test evaluates a bank's record of helping to meet the credit needs of its assessment areas through qualified investments that benefits its assessment areas or a broader statewide ore regional area that includes the banker's assessment areas. in evaluating the investment performance of a bank, the regulator considers the dollar amount of qualified investments, the innovativeness or complexity of qualified investments; the responsiveness of qualified investments to credit and community development needs; and the degree to which the qualified investments are not routinely provided to private investors.

What is a loan to value ratio?

The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate. Additionally, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender. This type of insurance is called private mortgage insurance (PMI).

What is the development performance test for small banks under the CRA?

The regulator considers a bank's loan-to-deposit ratio; its percentage of loans and other lending-related activities in its assessment areas; its record of lending to an engaging in other lending-related activities for its borrowers of different income levels and for businesses and farms of different sizes; the geographic distribution of its loans; and its record in responding to written complaints about its performance in helping to meet credit needs in its assessment areas.

What happens on de novo review?

The reviewing court must obtain from the court any additional info that is needed. If the court has questions, they need to request affidavits or testimony.

Why were the risk-based capital standards were developed?

The risk-based capital standards were developed to address the issues of credit risk and off-balance sheet items which also increase risk for the bank.

What is the second step of calculating risk-based capital ratios? What are the conversion factors?

The second step-multiply amount of each type of off-balance sheet item by the appropriate "credit conversion factor" Purpose is to convert each off balance sheet item into a hypothetical on balance sheet "credit equivalent amount." i.100% conversion factor for: Direct credit substitutes Assets sold with recourse. ii.50% credit-conversion factor "Transaction-related contingencies" The unused portion of committed lines of credit with an original maturity exceeding one year. iii.20% credit conversion factor. Commercial letters of credit. Commonly use in the purchase and sale of goods. Account party (customer) is purchaser and beneficiary of the seller. Upon shipment of goods, seller will present letter of credit and documents evidencing shipment of goods to the bank Bank will then pay the beneficiary or the beneficiary's bank. Commercial letters of credit have a 20% conversion factor because they tend to be short-term and self-liquidating. 0% credit conversion factor. Unused portion of committed lines of credit with an original maturity of one year or less. One year or less is a lower risk. Lower risk when it's a shorter term. Bank makes a formal commitment to provide a 50k commercial line of credit for one year Customer does not borrow any amounts under the line.

What is the seventh step of calculating risk-based capital ratios?

The seventh step-Determine amount of total capital by adding tier 1 capital and tier 2 capital. Cannot have more tierterm-404 2 capital than tier 1 capital If tier 2 capital is greater than tier 1 capital, only include amount of tier 2 capital that is equal to the amount of tier 1 capital. If tier 1 capital is 15 million Tier 2 capital is 20 mil Only includes 15 mil from tier 2 capital. Total capital would be 30 mil.

To facilitate rapid evacuation during a fire or other emergency, the State of Albacoria building code requires that the doors of any "place of public assembly" open outward. A "place of public assembly" includes any room used by retail business customers if more than 50 persons can occupy the room. Although Baracuda National Bank's lobby can hold more than 50 persons, the doors of the lobby open inward. Can the state require the bank to modify its doors so that they open outward?

The state can require this, doesn't significantly interfere. Nothing to do with consumer financial issues.

What is an IAP (institution affiliated party)?

The term "institution-affiliated party," or IAP, is defined in 12 USC 1813 (u) and includes bank directors, officers, employees, and controlling shareholders. ii.Agents iii.A person in the process of acquiring control These individuals are subject to enforcement actions regardless of whether they participated in the affairs of the institutions. iv.Shareholders v.Consultants. vi.Joint venture partners. These individuals are subject to enforcement actions if they actually participated in the conduct of the institutions' affairs. vii.Independent contractors Attorneys Appraisers Accountants

Are charitable activities permitted by banks?

These are permitted by 12 USC section 24 which authorizes national banks to contribute to community funds, or to charitable, philanthropic, or benevolent instrumentalities conducive to public welfare, such sums as its board of directors may deem expedient and in the interests of the association, if it is located in a State the laws of which do not expressly prohibit State banking institutions from contributing to such funds or instrumentalities.

Camp v. Pitts. They are not required to have a type of hearing or formal findings for approving new bank apps. Why?

They say no, no de novo hearing, but will get additional explanation to determine if the agency was acting in an arbitrary or capricious manner (Standard of review) Cannot be de novo, when the agency itself isn't required to hold a hearing. Courts need to review the record already in existence and not a new record made in the reviewing court.

What happened in Kim v. Office of Thrift Supervision?

This bank was unprofitable until Kim became chief executive officer and bank became profitable again -Were lending questionable loans and other bad things -The OTS issued a notice of charges Order has to be arbitrary and capricious. OTS has to show that MR. Kim violated more than one laws or violations Conduct involved willful or continuing disregard OTS has to prove misconduct, adverse effect, and culpability. Court finds substantial evidence that show that effect and misconduct prongs were already met.

The state of Floundria recently enacted a statute prohibiting any bank from foreclosing on any loan secured by the borrower's primary residence unless the bank can prove that the borrower obtained the loan by fraud. This moratorium will remain in effect for three years. In enacting the moratorium, the legislature cited the state's high unemployment rate, the sharp drop in real estate values, other economic distress, and evidence that banks and other mortgage lenders have failed to keep proper records of borrowers' payments. The OCC is concerned about how the moratorium will affect national banks operating in Floundaria. The agency anticipates that the moratorium will reduce the value of banks' mortgage loan portfolios, make borrowers more likely to default, and discourage banks from making new mortgage loans. Can the OCC properly determine that the National Bank Act preempts the moratorium? If the OCC wishes to make such a determination, how should it proceed?

This would be preempted because it's interfering with the OCC's broad powers to make loans. It doesn't necessarily mean there was fraud present here, for somebody not to pay. Could have willfully decided not to pay or maybe just didn't have the money. Either way, the moratorium goes on for 3 years which is a very unusual interference with the bank's ability to make loans and get paid back on those loans.

Standard of Review-> Courts reviewing determinations by the Comptroller that a state law is preempted by National Bank Act must consider the:

Thoroughness evident in the agency's consideration Validity of the agency's reasoning Consistency with other valid determinations and Any other persuasive and relevant factors

How is the FDIC funded?

Through deposit insurance funds

How did the FDICIA require FDIC to explore all options and find the least costly method to resolve the bank failure?

Through the following: Repaying depositors for uninsured deposits. Merging Recapitalizing Divesting.

Second divide tier 1 capital by the bank's total assets 15k common shareholder's equity 5k noncumulative perpetual preferred stock 20k tier 1 capital What is the bank's tier 1 leverage ratio? Does this bank comply with the leverage limit?

Tier 1 capital/total assets=20k/500k=4% Yes.

Tier 2 capital consists of:

Tier 2 capital consists of all other forms of qualifying capital i.Term subordinated debt If weighted average life is a minimum of 5 years. If unsecured. ii.Preferred stock that is cumulative or has a maturity date. If bank has the tight to defer dividend payments. Iii. Allowance for loan and lease losses (ALLL) Reserves held for potential losses on loans and leases. ALLL can be included in Tier 2 capital only up to 1.25% of the risk-weighted assets

What are some restrictions on acquisitions, opening a new branch or starting a new line of business for an undercapitalized institution?

To make an acquisition, open a new branch, or start a new line of business: 1.Must be implementing an approved capital restoration plan 2.Must obtain approval from regulator for proposed action and 3.Regulator's approval of proposing action must be based on determination that the acquisition, new branch or new line of business will help the plan succeed.

What is the public policy goal for community reinvestment rules?

To make sure credit is made available to local communities Particularly low income areas.

What were the usury Limits for State Chartered Banks 12 USC Section 1831?

To prevent discrimination against state chartered banks, if the rate in this statute exceeds the rare a State bank would be permitted to charge under State law, the State bank may, notwithstanding any State law which is hereby preempted, change on any loan interest. i.At a rate of not more than 1% above the discount rate on 90 day commercial paper OR ii.At the rate allowed by the laws of the State where the bank is located. Whichever is greater^

(True or false) Banks can follow their own strategy for meeting the CRA obligations

True if the strategy is approved by the CRA.

(True or false) Predatory lending is often focused on subprime borrowers

True.

True or false: .to be included in a depository institutions tier 1 capital, preferred stock must be noncumulative and must be perpetual

True.

True or false: A speculative commercial real estate loan does not yet have a source of repayment.

True.

True or false: Comptroller may not preempt a State Consumer Financial Law unless substantial evidence made on record supports the specific finding of preemption in accordance with the "legal standard" of the Barnett Bank decision.

True.

True or false: Mezzanine tranches received investment grade ratings, usually BBB rating

True.

True or false: Originators may not, in general, receive compensation based on the terms of a transaction (for ex: for originating loans with excessive points or fees, prepayment penalties, or higher interest rates)

True.

True or false: Some financial institutions may be able to asset a preemption defense against state law claims based on wrongful disclosure practices, on the ground that a governing federal state or regulation occupies the field or explicitly ousts state court remedies.

True.

True or false: The more absolute discretion of the lender, the stronger the bond of the borrower but the greater the incentive of the lender to behave opportunistically. Conversely, the more expansive the interpretation of the duty of good faith to control the opportunistic behavior by the lender, the weaker is the bond of the borrower and the less able the borrower is to use the bond to obtain more favorable credit terms.

True.

True or false: many no doc loans ( in which the lender advances credit even though the borrower has failed to supply key documentation to justify the lender's underwriting standards) went into default during and after the financial crisis.

True.

(True or false) Dodd-Frank does not address preemption for national banks of state laws that are not state consumer financial laws.

True. For national banks the Act addresses preemption of state consumer financial laws only.

True or false: Borrowers involved with a mortgage dispute with a bank may use a violation of the ATR requirement as a defense in a foreclosure action, at any time during the life of the loan.

True. They can't prevent the foreclosure but can claim damages as a recoupment or sendoff.

What is a savings and loan holding company?

Under the Home Owners' Loan Act (HOLA), a savings and loan holding company (SLHC) includes any company that directly or indirectly controls either a savings association or any other company that is an SLHC. Unitary thrifts, also known as savings and loan holding companies, or SLHCs, are a type of holding company that mainly holds assets in thrift investments. Thrift institutions, also known as savings and loan associations, offer a narrower range of products than other financial institutions. Unitary thrifts focus on customer and community service, which typically means they deal with traditional basic banking products, such as savings and checking accounts, home loans, personal loans, automobile loans, and credit cards. These thrifts are more limited in these areas, such as providing loans for single-family homes as opposed to larger real estate ventures. Similarly, they focus on individuals and have only limited dealings with businesses. Thrifts are required by law to maintain 65% of their portfolio in assets related to housing or other qualified assets while they are only allowed to have 10% of assets in commercial loans.12

What is securities underwriting?

Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans, insurance, or investments. The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium. Securities underwriting, which seeks to assess risk and the appropriate price of particular securities—most often related to an IPO (initial public offering)—is performed on behalf of a potential investor, often an investment bank. Based on the results of the underwriting process, an investment bank would buy (underwrite) securities issued by the company attempting the IPO and then sell those securities in the market. Underwriting ensures that the company's IPO will raise the capital needed and provides the underwriters with a premium or profit for their service. Investors benefit from the vetting process that underwriting provides and its ability to make an informed investment decision.

What are the steps in the bank chartering process?

Very long and involved. Might be working on it for a full year and you might not even be successful. Requires: a.Prefiling meeting.Pitch the bank to the regulators. Vanilla bank? Likely to be approved. Something new? Not so clear cut. Can get the impression on whether it will be approved or not based on body language. If they're leaning away and folding their arms, maybe suggest a change. b.Charter applications for the national banks. Approved by comptroller of the currency i.Qualifications of the organizing group Have to demonstrate history of responsibility, honesty and integrity. ii.Business plan for the proposed institution. Earnings prospects, including a pro forma balance sheet and pro forma income statement. Description of proposed Senior Management. Description of proposed initial Capitol. Have to provide plans for serving the interest of the communities. A showing that organizers understand and will comply with applicable banking laws and regulations.

When does the common law tort of slander apply to wrongful foreclosure?

When a party has wrongfully disparaged an owner's title to land, causing damages.

Standard for filing SARs has become very low since 9/11. Why?

When in doubt, banks generally file a SAR rather than risk the govt later determining that a SAR should have been filed. Banks pay particular attention to wires because the 9/11 hijackers used wires to transfer money.

Why is the Federal reserve lowering the discount rate a bad thing?

When you increase the discount rate, it is more expensive to borrow so you're gonna borrow less. Federal reserve is going to pull back, so banks didn't borrow. Money supply going down which caused more bank failures.

What is wild cat banking?

Wildcat banking refers to the banking industry in parts of the United States from 1837 to 1865, when banks were established in remote and inaccessible locations. During this period, banks were chartered by state law without any federal oversight. Less stringent regulations on the banking industry at the time led to this period, also being referred to as the Free Banking Era.

Suppose that a bank caused to be recorded in the hall of records a statement that a particular property had been sold under a foreclosure sale, when in fact no such sale happened. Could a slander tort case be used to establish liability?

Yes because no conscientious buyer, and no title insurance company, would proceed with a purchase transaction after discovering this statement in the records.

Does the QM rule favor large institutions?

Yes. The 3 percent cap on points and fees creates potential pitfalls for small lenders who lack sophisticated controls needs to prevent inadvertent violations. Small lenders, therefore, may hold back on fees and points, requiring them to charge a higher interest rate. Since interest rates are the price point most borrowers look to, small lenders may find themselves at a competitive disadvantage vis-a-vis their larger and more technologically sophisticated rivals.

Did proprietary trading and owning hedge funds and private equity funds by Banks contribute to the financial crisis?

Yes. The more banks buy up stocks in the market, the more it creates swings.

In what situations would IAPs be subject to enforcement action?

a.A breach of fiduciary duty b.A violation of any law or regulation or c.Am unsafe or unsound practice AND The action causes or is likely to cause: i.A significant adverse effect on the institution or ii.More than a minimal financial loss to the institution.

These individuals (IAPs) are subject to enforcement actions if they knowingly or recklessly participated in:

The lending limit is comprised of 2 rules:

a.A national bank cannot lend more than 15% of bank capital to one borrower Loans made under 15% limit can be secured or unsecured b.A national bank can lend additional amounts up to 10% of bank capital to same borrower if additional amounts are fully secured by readily marketable collateral. Ready marketable collateral must have a market value that is equal to or greater than the amount of the additional loans.

September 16 2008-US govt bailed out AIG (American International Group). Why did they do this?

a.AIG is the Largest insurance company in the world b.AIG issued credit default swaps c.Provided insurance against default on MBS d.Lost billions e.Federal reserve gave AIG 2 year 85 billion loan in exchange for a warrant to purchase 80% in the company Didnt end up doing so f.Investors in Lehman securities had purchased insurance fomr AIG to cover losses if Lehman failed g.Govt bailed out AIG because of fear that if AIG fid not pay on insurance policied, it would cause a domino effct og bank failures h.Despite bailout stock market plummeted agains, almost 450 points.

Issues with a bank run:

a.Bank is forced to sell its assets at distress sale prices b.First depositors demanding repayment usually paid. c.Last depositors demanding repayment usually lose money.

Why is the banking system uniquely susceptible to runs and panics?

a.Banks have a significant amount of demand debt. b.Banks keep only a fraction of their deposits on hand as reserves at any one time.

Who do mergers and consolidations require the approval of?

a.Boards of directors of each institution b.At least ⅔ of the shareholders of each institution c.Comptroller of the currency.

What are the overarching safety and soundness requirements for banks?

a.Capital requirements are minimum standards b.If a bank has assets that are particularly risky, the bank may need additional capital to support those assets. c.Im addition to minimum capital requirements, a bank is required to always operate in a safe and sound manner.

With federal deposit insurance, bank runs and panics rarely occur. Why?

a.Continental illinois bank-run in 1984->liquidity insolvency b.Indy Mac Bank->Run in July 2008-> liquidity insolvency FDIC vecame conservator ii.Trandferred insured deposits and most assets to IndyMac Federal bank Blamed the run on senator schumer. Wrote letters to consumers that there could be a run and it will fail. Got leaked to the press iii.Sold to oneWest bank in March , 2009. c.Washington Mutual bank-> run in september 2008-> liquidity insolvency i.FDIC became receiver ii.Sold most of its assets and liabilities to JPMorgan Chase bank.

Bear Stearns had issues credit default swaps on MBS. Why is this?

a.Credit default swap is a derivative. b.A derivative derives its value from something else. The value of a credit default swap is delivered from the likelihood of a borrower defaulting. c.If the borrower is more likely to default, then the value of the credit default swap goes up. d.As mortgages began to default, the value of the credit default swaps began to increase e.As the value of credit default swaps increased. Bear Stearns had to provide more collateral in the form of securities to ensure that it could pay in the event the credit default swaps were triggered. f.Counterparties on these credit default swaps began to worry that the same collateral was used to secure different credit default swaps g.Counterparties continued to demand more and more collateral h.Bear Sterns tried to borrow from its short-term creditors to purchase more collateral i.Short-term creditors refused to lend any more money and demanded repayment of the outstanding debt. j.As a result of this run on the bank by the short-term creditors, Bear Stearns experienced a liquidity crisis. k.Also, Bear Stearns held credit default swaps issued by AIG l.Bear Stearns had to write down the value of these credit default swaps on its books, which made its financial condition worse. m.Financial system is very interconnected.

Loans made to a borrower will be attributed to another party for purposes of lending limit and loans will be aggregated when:

a.Direct benefit is provided. Borrower transfers proceeds of loan, or assets purchased with proceeds of loan, to another party and transfer is not an arm's length transactions. b.Common enterprise exists among borrowers at the same bank i.If two borrowers are relying on some expected source of income to pay their respective loans and neither has another source of income sufficient to pay the loan and the borrower's other obligations ii.If one borrower controls, is controlled by, or is under common control with another borrower, and at least half of borrower's revenues or expenses come from transactions with the other borrower. iii.If purpose of loans to each borrower is to purchase the same business, and borrowers will co;lelctively own more than ½ the voting interest in business. iv.If the OCC determines that a common enterprise exists.

How is Washington Mutual a prompt corrective action example?

a.FDIC as receiver facilitated acquisition of WaMU by JP Morgan Chase b.WaMu was closed on a Thursday night by the OTS and reopened Friday morning as part of JPMorgan Chase bank. cAll the depositors were fully protected and the FDIC did not lose any money.

What is the first step of calculating risk-based capital ratios?

a.First step: sort bank assets into 4 risk weight categories i.0% risk weight for assets that have no credit risk Cash Foregin currency Us government obligations such as treasury bills Reserve held at a regional federal reserve bank Gold bullion ii.20% risk weight for assets with some credit risk General obligations of state and local govts Backed bu full faith and credit of the state or local govt. Obligations conditionally guaranteed by the us govt. Loans guaranteed by small business admin. Only the guaranteed portion of loan will be in the 20% risk weight category. Commercial loan of 100k with an 85% SBA guarantee-> only 85k will be in this category. Claims against US depository institutions. Borrowings of federal funds., Mortgage-backed securities guaranteed by Fannie Mae and Feddie Mac. iii.50% risk-weight for assets with more credit risk. First mortgage loans on 1-4 family residential property. Revenue bonds issued by state and local govts. Repayment comes from revenues from the facilities financed Not backed by the full faith and credit of the state or local govt. Iv. 1005 risk-weight for assets with the highest level of credit risk. All other loans to private borrowers The bank;s premises and equipment All other real estate owned. iv. 150% risk weight for the past due debt. These assets have a high degree of default.

How can IAP issues be resolved by a Written agreement?

a.Formal agreement between agency and bank to correct certain problems of the bank Not just saying they agree, but formally signing an agreement. b.Violation can result in cease and desist order, civil money penalties, and or removal of institution affiliated party.

Why is there an absence of a freeze out provision for national banks?

a.Freeze-out merger-> majority shareholders can approve a merger transaction that squeezes out minority shareholder. b.Minority shareholders- receive cash in exchange for their stock. c.Marjotiy shareholders->receive 100% of stock of surviving corporation.

What do predatory loans include?

a.High fees such as points on a mortgage b.Interest rates that are substantially higher than necessary to compensate the lender for the risk of the loan. c.Balloon payments-loans comes due when there is still a sizeable balance. i.Lenders knew borrowers would not be able to afford the balloon payment. ii.Borrwers would be more likely to agree to Flip (refinance) into another mortgage loan with higher interest rates and additional fees. d.Prepayment penalties i.Lender wanted to prevent a borrower whose creditworthiness may improver over time from refinancing with another lender. ii.If interest rates reduce, lender wanted to prevent borrower from refinancing elsewhere at a lower interest rate. e.Negative amortization Principal amount of the loan increases during term of the loan rather than decreases Pay option ARM: borrower has the option of how much to pay each month

What do Predatory lending practices include?

a.High pressure marketing to low income or elderly individuals b.Using borrower's lack of knowledge or inexperieince in borrowing money to encourage a borrower that would qualify for a prime loan to take a loan with less favorable terms. c.Making the loan based on equity in house tather than ensuring that income orf borrower is sufficient to cover loan payments. d.Rushing through disclosure information so borrower does not understand the terms and risk of the loan.

Incentive for the predatory lender is to obtain what during the subprime mortgage crisis?

a.Large fees upon making the loan and/or b.Collateral upon the anticipated default of the loan

September 15, 2008- Lehman Bros declared bankruptcy. Why did they do this and why does it matter?

a.Lehman Bros large positions in MBS backed by subprime debt b.Experiencing huge losses c.Largest bankruptcy in US history Stock market dropped 504 points

What is a leverage limit?

a.Leverage Measure of amount of debt financing relative to equity financing b.Adequately capitalized-> minimum leverage ratio of at least 4% Leverage ration=Capital/total assets Adequately capitalized-> leverage ration greater than or equal to 4%

What are supplemental rules of insider lending

a.Loans to a business venture controlled by an insider are treated as loans to consider i.Controlled-owns controls or had the power to vote 25% of voting shares ii.Business venture is considered a "related interest" of the insider. Ex: more than 500k, need board approval b.Insiders of a bank's parent company or affiliated sister companies are treated as insiders of the bank. c.An insider is prohibited from knowingly receiving an extension of credit that violates the insider lending statute. d.Preferential lending to a correspondent bank's insiders is prohibited. e.Loans to executive officers are restricted.

What is so bad about bank runs?

a.Losses to uninsured depositors. b.Discrimination in favor of those who run and against those who do not run. c.Forced liquidation at distress sale prices. d.Danger and transaction costs of liquidity runs Runs on solvent banks that do not have enough cash on hand to meet withdrawals. e.Systemic risk->risk of an event that disrupts financial markets i.Domino or cascading effect. Failed bank owes money to other banks. Failure of first bank causes failure of other banks ii.Contagion effect Generalized bank panics Localized bank panics

What does the national bank act say?

a.National bank can merge into or consolidate with a state bank under a state charter. b.National bank can merge into or consolidate with a national bank under a national charte d.State bank can merge into or consolidate with a national bank under a national charter.

What are the usury limits on National Banks?

a.National bank usury limits-> 12 USC section 85 b.National banks can charge the highest of the three rates. i.Rate permitted by the state in which the national bank is located except when a state sets a different rate fpr state chartered banks, a national bank can charge the same rate. ii.One percent above discount rate for 90 day commercial paper at federal reserve bank in national bank's district. iii.If no interest rate ceiling is designated by state law, then national bank can charge seven percent

What are the matters requiring attention by the NCUA for banks and credit unions?

a.Noncompliance with the law, regulation or guidance b.Noncompliance with internal controls. Ex: Tellers are required to have large transaction approved by the head teller, and tellers keep forgetting to do that, that's internal control that's not being followed. c.Unsound corporate governance practices

What are five basic rules on preferential terms?

a.Preferential terms to insiders are prohibited. b.Prior approval by the board of directors required for total extensions of credit to an insider that are greater than: 500k or 5% of the bank's capital, whichever is less. c.Extensions of credit to an insider must comply with national bank lending limit. Total extensions of credit to a single insider canot exed 15% of bank's capital plus another 10% of capital if secured by readily marketable collateral. d.Aggregate extensions of credit to all insiders are limited to 100% of bank's capital. If a bank has capital of 10 million, the bank cannot lend more than 10 million in the aggregate to insiders. e.Overdrafts by executive officers are directors can be paid only if: i.Insider has an overdraft line of credit or ii.Transfers funds from another account to cover the overdraft.

October 14, 2008-> Treasury Secretary determined that using TARP funds to purchase troubled assets would not work quickly enough and instead announced the TARP Capital Purchase Program. What did this program do?

a.Provide immediate capital to banks to increase the flow of capital to businesses and consumers and to support the economy b.Treasury could purchase up to $250 billion of senior preferred shares from qualifying US banks and thrifts. c.Treasury received warrants to purchase the additional shares. d.Shares were non-voting except for any action that would adversely affect the shares. e.Shares paid dividends to the government f.To qualify for the program, banks had to be financially healthy and recommended by federal bank regulator. g.Program designed to generate a positive return to taxpayers. People screamed that govt was bailing out the banks (securities firms too) h.Treasury purchases $245 billion form 707 financial institutions. Ended up becoming a huge success because the treasury got back $273 billion which had been recovered. Treasury earned $28 billion from interest, dividends, and fee income. q.Temporary liquidity guarantee program

What does the Home Mortgage Disclosure Act of 1975 say?

a.Requires financial institutions to disclose to the public the amount and location of their home mortgage and home improvement loans b.Mortgage lenders are also required to report: Ethnicity Race Gender Income of borrowers and applicants. Graham Leach Bliley- prohibits info from going to unaffiliated third parties.

As a result of the credit crisis, banks experiences a liquidity crisis, which was worsened by:

a.Runs on retail deposits held buy its customers b.Runs on interbank deposits wjici are deposits held by other banks

How can IAP issues be resolved by a cease and desist order?

a.Stop an unsafe or unsound practice or illegal activity b.Require bank or institution affiliated party to rectify problems resulting from unsafe or unsound practice or illegal activity.

What happened to subprime residential mortgages during the subprime mortgage crisis?

a.Subprime mortgages offered individuals who could not qualify for a prime loanthe opportunity to own a home b.Subprime mortgages offered more affluent individuals the opportunity to purchase a very expansive home, a second home or speculate in real estate c.Starting in 1999, housing prices began to increase sharply due to speculation in the real estate market and low teaser rates

How is IndyMac bank not a prompt corrective action example?

a.The Office of Thrift Supervision closed IndyMac in July 2008 and the FDIC became conservator b.FDIC transferred insured deposits and all the assets to IndyMac Federal Bank, a bridge financial company, which FDIC operated as conservator. c.IndyMAc had approximately 1 billion of potentially insured deposits held by approximately 10k depositors. d.FDIC paid uninsured depositors and advance dividend equal to 50% of the uninsured amount (500 million) e.In March 2009, the FDIC sold IndyMac federal bank to OneWest Bank, FSB. f.OneWest assumed all the deposits (insured)n and most of the assets of IndyMac Federal Bank g.OneWest agreed to purchase 20.7 billion of assets at a discount of 4.7 billion h.The insured depositors did not lose money but, uninsured depositors lost half their money, equal to 500 million/ i.The total estimated loss to the deposit insurance fund is 10.7 billion k.IndyMac committed alleged fraud in underwriting residential mortgages. l.IndyMac specified in Alt A mortgages, or Alternative A pape

How can IAP issues be resolved by conditional approval?

a.Used when a bank applied to open a new branch, engage in a new line of business or acquire another bank b.Approval may be conditioned on a ceratin requirements or restrictions c.Violation can result in cease and desist order. Civil money penalties and/or removal of institution affiliated party.

How does a shareholder dissent to a merger and consolidation?

a.Voting against the transaction or b.Providing written notice of dissent Entitled to an appraisal remedy Shareholder receives fair value of shares in cash

In the 1980s, since banks could not increase their interest income by investing in more assets, what happened?

banks increased their interest income by investing in riskier assets that had a higher interest rate. -Banks were now subject to higher credit risks. -Bank assets had a higher risk of default. Leverage limit placed restrictions only on the amount of assets, not the type of assets. Leverage limit focused on amount of capital and assets listed on a bank's balance sheet. Banks began focusing on items not listed on the balance sheet. Ex: contingent liabilities. A liability subject on the occurrence of a future, uncertain event. Not shown on the balance sheet.

What kind of consumer loans does the Truth in Lending Act cover?

consumer loans intended for personal, family, household, and agricultural needs.

What factors contributed to the housing bubble?

d.Start of the housing bubble-sharp increase in housing prices without a sharp increase in the value of other assets. e.Mortgage lenders began offering unconventional mortgage loans to the subprime market. : i.Pay Option ARMs. ii.ARMs with low introductory teaser rates for a short period that would increase to a much higher rate. Ex: 2/28 or 3/27 ARMs with 30 years repayment terms. Re-priced after first 2 or 3 years to higher rate.

What is the sixth step of calculating risk-based capital ratios?

determine amount of Tier 1 common equity, tier 1 capital and tier 2 capital.

What are retained earnings?

earnings retained in the entity and not paid out as dividends.

What is the rationale for the general rules that desporitor y institutions mau not hold equity securities?

equity securities are more risk than debt securities. Equity: higher rates of return. The higher the risk the higher the return.

What was the McFadden Act of 1927

gave national branches the ability to branch in their home office cities to the same extent that state law allowed state banks to branch in their home office cities.

Under the Dodd-Frank Act, each Federal Act, each federal agency was required to:

i. Instead, each Federal agency was required to substitute a standard of creditworthiness that the agency determined to be appropriate. Ii. OCC issued rules that replaced references to NRSRO credit ratings with non-ratings based standards of creditworthiness iii.National banks and Federal thrifts are now required to make their own assessments og a security's creditworthiness. iv.Under the new rule, a security would "investment grade" if the issuer of the security has an adequate capacity to meet commitments under the security for the projected life of the asset. To meet this new syamdard: 1. Risk of default is low 2.Full and timely repayment of principal and interest is expected. vi.For a structured security, the determination that full and timely repayment is expected may be influenced by the quality of the underlying collateral, cash flow, and structure of the security. viii.Structured security relies primarily on the cash flows and performance of underlying collateral for repayment, rather than the credit of the issuer. Ix. National banks and federal thrifts can choose to use credit ratings as part of the "investment grade" determination; however, the bank myst supplement the external rating with its own due diligence and analysis. A risk management committee would set forth the procedures but someone else would carry it out.

What is Cumulative preferred stock?

i.Any dividends that are accrued nut not paid to the preferred stockholders will remain owing to preferred stockholders ii.These unpaid dividends cumulate over time until bank can make the payments. iii.The common stockholders cannot be paid any dividends until all unpaid dividends owing to preferred stockholders are paid.

What is Noncumulative preferred stock?

i.Any dividends that are not paid to the preferred stockholders do not remain owing ii.Unpaid dividends do not cumulate over time iii.Common stockholders need to wait only for that year's preferred dividend to be paid before the common stockholders are paid.

Why was IndyMac regarded as a corrective action failure as opposed to Washington Mutual?

i.Bank engaged in accounting fraud in which the OTS allegedly conspired. ii.OTS allegedly allowed IndyMac to record $8 million of a $50 million capital infusion from its holding company as 1st quarter capital when the transaction actually took place on May 9th which is 6 weeks after the 1st quarter needed. Indy Mac's capital ratio was above 10% for the 1st quarter of 2008. The reason why IndyMac did this was so that they could be well-capitalized rather than adequately capitalized. Indycmac needed to be well capitalized so it could accept brokered deposits. Large deposits placed by brokers seeking very high rates.

.Loans to executive officers are restricted. Why?

i.Banks may extend credit to an executive officer in any amount to finance: Education of the officer's children or Purchase, construction, maintenance or improvement of officer's residence if secured by a 1st mortgage on the residence, ii.Aggregate amount of extensions of credit bank may lend to an executive officer for any other purpose may not exceed 100k. iii.Any loans made to executive officers must be subject to condition that loan will, at option of bank, become immediately due and payable at any time officer is indebted to any other banks in an aggregate amount greater than amount the bank itself could lend to that officer. Any loan made to an executive officer will be subject to the condition that the loans will be immediately payable when the officer gets a loan from another bank.

Tier 1 capital consists of:

i.Common shareholder's equity (tier 1 common equity) ii.Non Cumulative perpetual preferred stock Tier 1 common equity and tier 1 capital. More permanent and reliable than tier 2 capital.

How are mortgage originators prohibited from steering customers into residential mortgages?

i.Consumer lacks the ability to repay, ii.Provide no net benefit to consumer in a refinancing (if the lender is the only one who benefits with more points or fees from the refinancing), or iii.Have predatory characteristics. b.Originators are prohibited from steering creditworthy customers from qualified to non-qualified mortgages. c.Prohibits abusive and unfair lending practices that promote disparities among consumers with equal creditworthiness but different race, ethnicity, gender, or age. d.Mortgage originator is prohibited from: i.Mischaracterizing the consumer's credit history or residential loans available to the consumer, ii.Mischaracterizing the appraised value of the collateral. Or iii.Discouraging a consumer from seeking a mortgage loan from another originator.

What can a bank do to prevent interest rate risk?

i.Decrease the duration of assets Invest in short term securities and make shorter term loans. Short term commercial loans to buy inventory-30, 60 or 90 days. Commercial loans to purchase equipment 1 to 5 years. Commercial mortgage loan 15 year term with 5 year balloon. What about residential mortgage loans- 30 year repayment? Banks sold bulk of residential mortgage loans to investment banks or government sponsored entities like Freddie Mac or Fannie Mae. Wanted to get these mortgages off their books. Investment banks and GSEs pooled mortgages in a process known as Securitization to create securities backed by mortgage loans. Mortgage backed securities sold to investors. ii.Increase the duration of its liabilities Sell longer term deposit products such as CDs Maturities of 3 months, 6 months, or 1-5 years. iii.Structure assets so high proportion of loans have adjustable rates rather than fixed rates. Commercial loans generally have adjustable rates. Suppose commercial loan is priced at Prime +1% If prime rate is currently 8%, borrower will pay 9% If prime rate moves up to 10%, borrower will pay 11% If prime rate reduces to 7%, borrower's rate will be 8%.

What are some exceptions to the Graham Leach Bliley Act of 1999?

i.Disclosures to a third party service provider that uses the information to provide marketing services for the bank if the service provider promises to maintain confidentiality. ii.Needed to process or administer a transaction requested by a consumer Ex: Third party service provider mails accounts statements to the consumer (withdrawls or deposits) iii.Requested or directed by the consumer iv.To protect the confidentiality of a customer's records, prevent fraud, or resolve disputes with customers. v.To attorneys, accountants, or auditors vi.To law enforcement agencies. Consumer investigated by law enforcement? Can report to them. vii,To consumer reporting agencies If consumer has a late payment viii.To comply with laws or regulations.

Under CAMEL how does the NCUA (National Credit Union Administration) determine the sensitivity to market risk requirement for banks and credit unions?

i.Examiners will review the bank's sensitivity to interest rate risk ii.Examiners will consider management's ability to identify, measure, monitor and control market risk.

For matters requiring attention in a bank such as noncompliance with the law, regulation or guidance; noncompliance with internal controls; or unsound corporate governance practices; what procedure does a bank regulator engage in to solve it?

i.Explain the concern ii.Note the cause iii.Explain the consequences of continuing the practice. Further downgrade and reduce the rating if the bank doesn't fix the practice. iv.Inform the board and management of the corrective action v.Obtain the commitment of the board and management to correct the concern by a specific completion date. Usually the reason they don't want to agree is some error by the examiner. Examiners aren't typically attorneys, why the disconnect sometimes occurs.

What does the NCUA do if there is a cause fo concern in a banks and credit unions?

What are 5 reasons how preferential terms to insiders are prohibited?

i.Extensions of credit to insiders must be on substantially the same terms as provided on comparable transactions to people who are not insiders. Merger transaction ex: very clear that the loan rates were ii.Extensions of credit include making or renewing a loan, granting a line of credit, or any other transaction that obligates a person to pay money to bank. iii.Loans to insiders cannot involve more than the normal risk of repayment. iv.Bank must follow the same level of underwriting procedures as for a comparable transaction. v.Exception for preferential extensions of credit that are part of a benefit or compensation program available to all employees. That is permissible if all employees can benefit

What are the 6 discretionary safeguards for Significantly undercapitalized institutions?

i.In addition to presumptive safeguards, regulator has discretion to: 1.Place additional restrictions on transactions with affiliates 2.Place additional restrictions on asset growth or require reduction on total assets 3.Restrict excessively risky loans. 4.Require a new election of directors, hire new senior executive officers, or remove any director or senior executive officer who has held position for more than 180 days before institution becoming undercapitalized. If they were there less than 180 days, not going to be let go under corrective action. 5.Prohibit depostirs from correspondent banks. 6.Require parent bank holding company to obtain prior approval from Federal Reserve for any capital distribution. Require institution to be divested or any subsidiary or affiliate of the institution to be divested (sold).

Prompt corrective action provisions of federal deposit insurance act directs each federal banking agency to establish two capital requirements:

i.Leverage limit ii.Risk based capital requirement

What is Perpetual preferred stock?

i.No fixed maturity date that would require the bank to repay stockholder upon maturity ii.No redemption rights-> stockholder cannot require bank to redeem or buy back the stock.

Originating bank counts only the amount if its own participation in the loan against its lending limit as long as:

i.Originating bank sells participations without recourse ii.Participating results in a pro rate sharing of credit risk proportionate to the respective interests of the originating and participating lenders.

What are some permitted banking activities under the volcker rule?

i.Purchase and sale of obligations of the US govt or any federal agency, and obligations of any state or political subdivision. ii.Purchase and sale of securities or other financial instruments in Connection with underwriting or market making activities To the extend such activities are designed not to exceed reasonably expected near term demands of customers or counterparties. Near term demand has been defined as "less than 60 days" iii.Risk-mitigating hedging activities that are designed to reduce Specific risks to the banking entity Hedge against interest rate risk in financial futures markets. iv.Investments in small business investment companies or Invesmtners designed to promote the public welfare v.Purchase and sale of securities on behalf of customers. vi.Organizing and offering a hedge fund or private equity fund if 1.Baniing entity provided bona fide trust, fiduciary or investment advisory services. And dund is organized and offered on in connection with these services and only to persons that are customers of these services. 2/Banking entity does not acquire or retain more than a deminimus ownership of the funds De minimus ownership means 3% or less of fund's equity measured one year from the fund's inception Must be immaterial to banking entity. Cannot exceed in aggregate 3% of Tier 1 capital.

a.Regulator has discretion to treat a depository institution as if it were in the next lower capital category if.:

i.Regulator considers institution to be in an unsafe or unsound consition, OR ii.Insitution had an unsatisfactory CAMEL rating in one or more of the 4 noncapital areas: Capital adequacy Asset quality Management Earnings or Liquidity. If problem has not been corrected, and as a result, regulator deems the institution to be engaging in an unsafe or unsound practice. Called an "AMEL downgrade." Maybe bad too if assets are bad. Could also be due to fraud

When is an undercapitalized restoration plan required?

i.Required to submit a capital restoration plan to its federal regulator for approval. Provide its plan for becoming adequately capitalized. ii.When an institution is undercapitalized, each company that controls the institution must guarantee that the institution will comply with the plan. The guarantee is limited to 5% of the bank's total assets. iii.Regulator is prohibited from approving a capital restoration plan that would increase depository institutions's exposure to any type of risk. Regulator's approval of a plan wmust be based upon a finding that: Plan is based on realistic assumptions and Likely to succeed in restoring the institution's capital Has to be realistic.

What is Common stock?

i.Residual claim on a company's earnings and assets ii.Common stockholders are paid after claims of all creditors are paid, inlcyding depositors, bondholders, subordinated debtjplders, and after claims of preferred stockholders are paid.

In 1980s, bank regulators began strictly enforcing the leveraging limit Regulators were enforcing limitations on the amount of assets a bank could have on its balance sheet based on the amount of the bank's capital. Since banks were more limited in the amount of assets they could have on their balance sheet, banks began:

i.Selling low risk, low rate assets and ii.Substituted high risk, higher rate assets.

Subprime loans experience a much higher default and foreclosure rate that prime loans because why?

i.Subprime loans are designed for individuals with less than stellar credit histories or no credit history ii.Application disclosure and verification process for subprime loans was very light in comparison to prime loans. iii.After teaser rates expired, subprime loans re-priced to a variable rate that was higher than interest rates on prime loans to compensate lenders for higher risk associated with a subprime loan iv.Subprime loans had repayment penalties so borrowers continued to try to make loan payments rather than refinance v.Lender relaxed underwriting standards.

What are the 3 presumptive safeguards for Significantly undercapitalized institutions? Are these safeguards always mandatory?

i.There are three presumptive safeguards: 1.Issuance or merger requirement-require institution to: a.Sell stock to become adequately capitalized but if that deos not work, b.Enter into a merger or acquisition. 2.Restricted from engaging in transactions with affiliated depository institutions and 3.Prohibited from paying a higher rate of interest on depost accounts than market rates in its region. ii.These safeguards are all mandatory. However, if a particular safeguard would not help to avoid or minimize loss to the deposit insurance fund, regulator has discretion to exempt the institution from having to comply with that safeguard.

Specifically qualified banks that are well-capitalized and well managed and have a satisfactory CRA record as permitted to engage through separately capitalized subsidiaries in:

i.Underwriting, dealing in, and brokering securities; ii.Acting as an investment advisor. iii.Selling insurance.

Who is affected when a bank fails?

i.Uninsured depositors ii.Borrowers (Reduces the availability of credit and liquidity) iii.Local communities iv.Employees v.Other banks-> may increase runs and cause other failyes. vi. Financial system-> may cause systemic risk vii.FDIC and taxpayers

Under CAMEL how does the NCUA (National Credit Union Administration) determine the liquidity requirement for banks and credit unions?

i.Whether the bank has sufficient funds to support its cash needs ii.Can the bank raise additional funds quickly and easily by selling assets or borrowing in the federal funds or from other sources?

Permitted activities by banks will be impermissible if they:

i.involve or result ina material conflict of interest between bank and its customers or counterparties. ii.Result in material exposure to high risk asses or high risk trading strategies or iii.Or pose a threat to the safety and souness of a banking entity or the financial stability of the US

Can interest be imposed as a penalty? (Smiley v. Citibank)

interest is compensation for money, for the use of money, or for damages for nonpayment. One example: late fees.

How does section 1411 of the Dodd Frank Act effectively bar "no doc" mortgages, in which the lender advances credit even though the borrower has failed to supply key documentation to justify the lender's underwriting standards?

section 1411 requires that the creditor make a good faith determination "based on verified and documented standards" that a consumer could pay back a residential mortgage loan.

As a result of liquidity crisis what happened to banks and thrifts?

some banks and thrifts could not pau their debts when they came die and quickly became insolvent and failed.

What is obstacle preemption?

state law is an obstacle to the accomplishment of purposes of federal law. State law is: State law says all banks open at 9 am, federal banks say all banks open at 10 am Obstacle preemption-State law is an obstacle to the accomplishment of purposes of federal law. State law is: Inconsistent with the federal law or Interferes with federal policy

What is Red lining? Why is it bad?

the practice of refusing to make loans in neighborhoods or communities that the bank has identified as representing a higher credit risk because the neighborhood is predominantly poor. The bank draws an imaginary red line and does not lend in that area. individuals in that area will have no source of credit available to them to finance a purchase of a home.

Why did the housing bubble burst?

vii.Borrowers started defaulting because their loans started re-pricing to a higher interest rate that they could not afford. viii.Borrowers tried to sell their homes, but what happens when there is an increase in supply? It causes prices to decline. A housing bubble, or real estate bubble, is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices—and the bubble bursts.

What are liabilities?

what the entity owns.

Why did foreclosures start occurring during the subprime mortgage crisis?

x.When housing prices began to decline, borrowers had even less incentive to continue to pay a mortgage that was larger than the value of the home. xi.More defaults occurred, and many borrowers abandoned their homes. xii. Foreclosures started occurring.

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